In re Tyco International, Ltd. Multidistrict Litigation (MDL 1335)
Docket: MDL No. 02-1335-B
Court: District Court, D. New Hampshire; June 12, 2006; Federal District Court
Lead plaintiffs, former shareholders of Tyco International, Ltd., allege securities fraud against Tyco, its former executives, and auditor PricewaterhouseCoopers (PwC). Plaintiffs claim that the defendants misrepresented the value of acquired companies and Tyco’s financial condition, while the executives misappropriated corporate funds through undisclosed bonuses and forgiven loans, constituting a scheme that defrauded investors in violation of federal securities laws. They assert violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as Sections 10(b), 20(a), and 20(A) of the Securities Exchange Act of 1934, and Rule 10b-5.
Plaintiffs seek certification of a class comprised of individuals and entities that purchased Tyco securities from December 13, 1999, to June 7, 2002, excluding defendants and their immediate associates. Proposed representatives include various pension funds and asset management entities. Tyco opposes class certification, arguing that lead plaintiffs are inadequate representatives, class member interests are too diverse, and questions of standing and conduct of certain plaintiffs exist.
To be certified, plaintiffs must meet the four requirements of Rule 23(a): numerosity, commonality, typicality, and adequacy, and demonstrate alignment with one of the criteria in Rule 23(b). The burden of proof lies with the plaintiffs, as established in relevant case law.
Plaintiffs must demonstrate that their class meets one of the criteria outlined in Rule 23(b), specifically seeking certification under Rule 23(b)(3). This requires proving that common legal or factual questions predominate over individual issues and that a class action is superior for fair and efficient resolution. The inquiry into class certification is intertwined with the factual and legal elements of the plaintiffs' claims. Although certification motions do not decide the merits of the claims, the district court must predict how specific issues might develop to determine the motion's viability. The court has broad discretion in granting certification, reviewed under an 'abuse of discretion' standard.
Tyco opposes class certification with five arguments, relating to both the adequacy requirement of Rule 23(a) and the predominance and manageability aspects of Rule 23(b)(3). Tyco's first argument centers on an "equity conflict," asserting that lead plaintiffs' interests in recovering damages conflict with those of equity holders, who may face a decrease in stock value should Tyco pay damages. Tyco distinguishes between equity holders, who currently own more Tyco stock than during the class period, and non-equity holders, including lead plaintiffs, who do not own Tyco stock. Tyco claims that payments to the class would negatively impact equity holders, thus creating a conflict that should prevent certification. They have submitted expert testimony to support this claim. In contrast, plaintiffs contest Tyco's assumption that such payments would lead to a stock price drop, citing historical data suggesting that stock prices often rise following announcements of settlements in securities fraud cases. However, plaintiffs' evidence does not entirely negate Tyco's equity conflict argument.
A company's stock price may increase following a settlement payment if the payment is less than what the market expected. However, an equity conflict could still arise if the stock price would have appreciated more had the case been dismissed without payment. The current evidence does not sufficiently address this potential conflict. Despite this, an equity conflict does not prevent class certification for other reasons. Equity holders have a vested interest in recovering their claims against Tyco, even if they may oppose other class members' recovery efforts, as any stock price decline from payments impacts all shareholders. For example, an equity holder's loss from a class member's payment is minimal relative to their overall stake.
Moreover, Tyco’s argument does not adequately consider the interests of non-equity holders; the proposed class includes many members unaffected by the equity conflict, who cannot pursue claims without class certification. While equity holders may want to limit recoveries by non-equity holders, they cannot obstruct the class's progress based on potential harm to their interests. Remedies such as substituting class representatives or redefining the class to exclude equity holders do not resolve the conflict, as these would either fail to address the underlying antagonism between subgroups or infringe on equity holders' rights to opt into or out of the litigation as permitted by Rule 23. Therefore, while the equity conflict remains, there are alternative methods for equity holders to manage it without precluding class certification.
Equity holders can transition to non-equity holders by selling their stock, allowing them to mitigate potential losses from a decline in Tyco's stock price linked to litigation announcements. If equity holders are concerned that lead plaintiffs will focus solely on Tyco and neglect claims against other defendants, they may request the certification of a subclass. Additionally, under Rule 23(c)(2)(B), equity holders have the option to opt out of the class. Those who remain in the class after being informed of any conflicts have little basis for challenging the adequacy of class representatives, as established in case law.
Tyco argues for immediate certification of a subclass, asserting that lead plaintiffs' interests may lead to neglect of claims against other defendants. However, the court finds this request premature, noting that lead plaintiffs are pursuing a strategy that aims to hold all defendants accountable. Tyco also has incentives to ensure that liability is shared among all defendants. Thus, equity holders remain protected without immediate subclass certification.
Tyco further contends that the class is unmanageable due to varying evidence requirements for loss causation based on the timing of stock sales. The court clarifies that loss causation, a critical element in securities fraud claims, requires proof that a stock price decline followed the disclosure of misconduct, not merely the existence of inflated prices at the time of purchase. The court references several precedents that outline this requirement, emphasizing the need for corrective disclosures to establish loss causation.
Tyco argues that the plaintiffs have improperly divided the class into subgroups based on the timing of stock sales relative to three corrective disclosures, claiming that class members who sold before the first disclosure should be excluded since they cannot prove loss causation. Tyco further contends that the remaining subgroups cannot be combined into a single class due to differing reliance on corrective disclosures for loss causation, which would complicate class management and representation adequacy.
The court rejects these arguments, stating that loss causation does not need to be pleaded with specificity under Federal Rule of Civil Procedure 9(b) or the Private Securities Litigation Reform Act. The plaintiffs have adequately indicated a causal connection between their losses and the corrective disclosures. The court emphasizes that it is premature to exclude former shareholders based on disclosures not yet identified, allowing for further development of the issue during discovery.
Additionally, the court finds Tyco's concerns about class manageability unwarranted, noting that classes can be certified despite individual issues as long as common issues predominate. The potential for varying loss causation determinations does not negate the shared issues that unify the class. Lastly, Tyco's argument about the adequacy of lead plaintiffs' representation is insufficient, as their timing of stock purchases and holdings supports a valid claim regarding all corrective disclosures.
Lead plaintiffs do not have conflicting interests with other class members regarding loss causation, as their interests would not be harmed by recognizing corrective disclosures, even if those disclosures do not benefit them directly. Tyco's argument that the complexity of the case, stemming from a two-year class period and numerous registration statements and public statements, makes it unmanageable as a class action is unconvincing. Despite the anticipated challenges, including over 70 million documents and 200 depositions, the predominance of common issues across the class justifies class certification. The plaintiffs assert that the case is grounded in a consistent scheme of fraud led by individual defendants, which unifies the class despite variations in individual claims based on purchase timing. Tyco's claim that combining Securities Act and Exchange Act claims is problematic due to differing interests is dismissed; both sets of claims are based on the same overarching conspiracy involving the same misstatements. Consequently, evidence that supports the Exchange Act claims can also bolster the Securities Act claims, undermining Tyco's argument about unmanageability in class certification.
Voyageur Tyco argues that it has standing to sue despite not suffering losses from the alleged fraud, claiming derivative standing due to an agreement allowing it to manage clients' stock transactions. However, U.S. Supreme Court precedent establishes that litigants generally must assert their own rights, not those of third parties, unless they meet three criteria: (1) having suffered an 'injury in fact,' (2) possessing a close relationship to the third party, and (3) the third party being hindered in protecting their own interests. Voyageur fails to demonstrate an 'injury in fact' as it does not claim direct injury from the alleged misconduct, thus lacking standing to sue on behalf of its clients.
In a separate matter, UAGO and UAOE are deemed adequate class representatives despite not producing all requested investment management agreements, as they have substantially complied with discovery requests. Consequently, their removal as lead plaintiffs is unwarranted. The court grants the plaintiffs' motion for class certification while removing Voyageur as a lead plaintiff due to the lack of standing. PwC, aligned with Tyco, opposes the certification but does not contest the numerosity requirement. This requirement is satisfied as the potential class size and geographic distribution make individual joinder impractical.
Millions of Tyco shares were traded during the class period, making joinder of potential class members impracticable. The commonality requirement for class certification is minimal; it is satisfied if named plaintiffs share at least one legal or factual question with the prospective class. The standard is qualitative, requiring only a single common issue. Plaintiffs argue that all class members were injured by a collective conspiracy, fulfilling this requirement. The typicality requirement is also met, as the lead plaintiffs’ claims stem from the same accounting fraud scheme affecting the entire class. Claims are considered typical if they arise from the same event or conduct and are based on the same legal theory. Conflicts among class members, referred to as 'equity conflicts,' do not invalidate the claims. The plaintiffs challenge Tyco's evidence that the proposed class includes several hundred equity holders, arguing that Tyco improperly aggregated mutual fund holdings and selected an arbitrary cut-off date of March 31, 2005, for determining equity holder status. They contend that this approach is flawed since equity holders can change status before a payment announcement. However, the court finds it unnecessary to evaluate these arguments as Tyco's equity conflict claim is dismissed on other grounds.
