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Tyco Agrees to Pay Monumental $3 Billion to Settle Investor Class Actions

Ouch.  On Tuesday, Tyco International announced that it will pay nearly $3 billion in cash payments to settle 32 securities class action lawsuits involving Tyco stock. This is reportedly the largest securities class action settlement by a single corporate defendant, and the fourth largest single payout to investors.  (San Francisco Chronicle article on the settlement)

The shareholder claims arose after Tyco’s former Chief Executive, Dennis Kozlowski, and other former executives were accused of looting the company of millions and artificially inflating the company’s value by over $5 billion. Kozlowski -- who was convicted of grand larceny, falsification of business records, and conspiracy in an alleged scheme to defraud investors -- was sentenced to up to 25 years in prison. Kozlowski became the poster child of corporate greed for his use of Tyco monies for extravagant parties, including an alleged $1 million for his ex-wife's birthday bash on the Italian island of Sardinia, and lavish furnishings for his Manhattan apartment,  such as a $15,000 umbrella stand and a $6,000 shower curtain.  (More on Kozlowski)

Investors could gain even more from the deal than $3 billion. As part of the settlement, Tyco agreed to assign to the class its claims against its former auditor, PricewaterhouseCoopers.  And, the class would further receive half of any recovery from Tyco’s suit against Kozlowski and other former executives.

Tyco plans to take the nearly $3 billion charge in its books this quarter.  It likely can easily foot the bill, with its 2006 revenue being $41 billion. Nonetheless, Tyco's $3 billion hit, along with its $50 million settlement in April 2006 of the SEC's frauduent accounting changes, is enough to give any Tyco official heartburn. (For more on SEC settlement, see Jurist article)  

The deal still requires court approval and participation by class plaintiffs holding a significant percent of Tyco shares.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on May 17, 2007 (boomark / email).