Ballard v. Tyco Int'l

2005 DNH 069

• Court: District Court, D. New Hampshire
• Decided: April 22, 2005
• Docket: Case 02-md-1335-PB
• Status: Published

Opinion

Ballard v. Tyco Int'1 02-MD-1335-PB 04/22/05

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Ballard et a l .

MDL Docket No. 02-1335-PB Civil No. 04-CV-1336-PB Opinion No. 2005 DNH 069 Tyco International et a l ,

MEMORANDUM AND ORDER

Plaintiffs are former shareholders of AMP, Inc. who acquired

shares of stock in Tyco International Ltd ("Tyco") on April 4,

1999, when Tyco and AMP merged ("AMP/Tyco merger"). They allege,

inter alia, that PricewaterhouseCoopers LLP ("PwC"), as Tyco's

auditor during the relevant time, violated Section 11 of the 1933

Securities Act (the "Securities Act") and Section 1 0 (b) of the

Securities and Exchange Act of 1934 (the "Exchange Act").

PwC argues in a motion to dismiss that plaintiffs' claims

against it are time-barred. For the reasons set forth below, I

grant PwC's motion. I. BACKGROUND

Plaintiffs are 33 family trusts and four individuals. When

Tyco and AMP merged on April 4, 1999, plaintiffs received 0.7839

of a share of Tyco stock for each share of AMP stock. Plaintiffs

acquired over 2.9 million Tyco shares as a result of the merger.

On January 20, 2004, plaintiffs filed a complaint in the

Southern District of New York against Tyco, several of Tyco's

former officers and directors, and PwC.1 Plaintiffs allege that

Tyco and its former officers and directors misled investors into

believing that the company was experiencing continuous, organic

growth when, in fact, Tyco's apparent success was instead a

result of fraudulent accounting. Specifically, plaintiffs charge

that Tyco's portrayal of itself as a "turn around" specialist,

able to identify troubled but promising companies, acquire them,

and turn them into profitable enterprises, was materially false

and misleading. Instead, plaintiffs allege, Tyco's improving

earnings performance resulted from improperly causing acquisition

1 Tyco has filed a separate motion to dismiss plaintiffs' claims against it and its former officers (Doc. No. 213). This Memorandum and Order addresses only plaintiffs' claims against PwC.

- 2 - targets, including AMP, to report artificially high pre-merger

losses in order to create the illusion of post-merger performance

improvements.

Plaintiffs also allege that during the relevant time, PwC

"(a) audited Tyco's financial statements; (b) issued materially

false and misleading opinions on those financial statements;

[and] (c) consented to the use of its ungualified opinions in

Tyco's publically filed statements." Compl. 5 51. Pursuant to

these audits, plaintiffs charge that PwC had access to Tyco's

internal accounting records, and thus to intimate knowledge of

Tyco's financial reporting practices. See Compl. 55 194-99.

According to plaintiffs, PwC either knew of or recklessly

disregarded Tyco's improper financial reporting and therefore was

complicit in the fraudulent scheme. Compl. 5 195.

This is not the first action that has been based in part on

Tyco's alleged misconduct in connection with the AMP merger. As

the complaint explains, on December 9, 1999, a number of Tyco

shareholders filed putative class actions against Tyco in several

different federal courts. See In re Tyco International, Ltd.

Sec. Litig. ("Tyco I"), 185 F. Supp. 2d 102, 109 (D.N.H. 2002).

- 3 - The actions were transferred to this court by the Judicial Panel

on Multidistrict Litigation and a consolidated complaint was

filed by the designated lead plaintiffs on behalf of the class.

The proposed class in Tyco I consisted of those individuals and

entities that had acguired Tyco stock between October 1, 1998 and

December 8, 1999, a period that includes the date on which

plaintiffs acguired their Tyco shares. PwC was not named as a

defendant. I ultimately dismissed the Tyco I complaint on

February 22, 2000, prior to class certification. Tyco I, 185 F.

Supp. 2d at 116.

II. STANDARD OF REVIEW

When considering a motion to dismiss under Fed. R. Civ. P.

12(b)(6), I must "accept as true all well-pleaded allegations and

give plaintiffs the benefit of all reasonable inferences."

Cooperman v. Individual Inc., 171 F.3d 43, 46 (1st Cir.

1999)(citing Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st

Cir. 1996)). However, while a court "deciding a motion to

dismiss under Rule 12(b)(6) . . . must take all well-pleaded

facts as true . . . it need not credit a complaint's 'bald

assertions' or legal conclusions." Shaw v. Digital Eguip. Corp.,

- 4 - 82 F.3d 1194, 1216 (1st Cir. 1996)(quoting Wash. Legal Found, v.

Mass. Bar Found., 993 F.2d 962, 971 (1st Cir. 1993)). Finally, a

complaint should not be dismissed under Rule 12(b)(6) unless it

"presents no set of facts justifying recovery." Cooperman, 171

F.3d at 46 (citing Dartmouth Review v. Dartmouth College, 889

F .2d 13, 16 (1st Cir. 1989)).

III. ANALYSIS

Prior to July 30, 2002, claims brought under § 11 of the

Securities Act had to be commenced "within one year after the

discovery of the untrue statement or the omission, or after such

discovery should have been made by the exercise of reasonable

diligence" and "no later than three years after the security was

bona fide offered to the public. . . ." 15 U.S.C. § 77m

(emphasis added). Similarly, claims brought under § 1 0 (b) of the

Exchange Act had to be commenced "within one year after the

discovery of the facts constituting the violation and within

three years after such violation." Lampf, Pleva, Lipkind, Prupis

& Petigrow v. Gilbertson, 501 U.S. 350, 360 (1991)(emphasis

added); see 15 U.S.C. § 7801(e).

- 5 - Section 804 of the Sarbanes-Oxley Act of 2002 ("SOX"),

extended the statutes of limitations and repose to two years and

five years, respectively, for private securities actions that

involve "a claim of fraud, deceit, manipulation, or contrivance."

Pub. L. No. 107-204 § 804, 116 Stat. 801, codified at 28 U.S.C. §

1658(b). The new limitations and repose periods apply to actions

that are commenced after the act's July 30, 2002 effective date.

Id.

PwC argues that plaintiffs' Securities Act and Exchange Act

claims against it are time barred because plaintiffs waited more

than three years after they acguired their Tyco stock to file

suit. Plaintiffs respond with two arguments. First, they argue

that their claims are timely because they are saved by the class

action tolling doctrine. Alternatively, they argue that their

claims are saved by the five-year repose period mandated by SOX.

I address each argument in turn.

A. Plaintiffs' claims against PwC are time-barred under the applicable three-year statute of repose

PwC argues that plaintiffs' claims must be dismissed because

they are barred by the applicable three-year statute of repose.

It is undisputed that the three-year repose period began to run

- 6 - on plaintiffs' claims on April 4, 1999, the date they acquired

their Tyco stock. It is also undisputed that plaintiffs did not

file their claim until January 20, 2004, nearly two years after

the three-year repose period expired on April 4, 2002.

Plaintiffs nevertheless argue that their claims are not time-

barred because the running of the repose period tolled between

December 9, 1999, when Tyco I was filed, and February 22, 2002,

when Tyco I was dismissed. See 185 F. Supp. 2d at 115-16. I

disagree.

In support of their argument, plaintiffs attempt to invoke

the class-action tolling doctrine articulated by the United

States Supreme Court in American Pipe & Constr. Co. v. Utah, 414

U.S. 538, 551 (1974). In American Pipe the Court held that in

certain situations, the filing of a class action pursuant to Fed.

R. Civ. P. 23 suspends the applicable statute of limitation and

repose periods for all putative members of that class while the

case is pending. Id. at 551. The Court explained that the

class-action tolling rule is necessary to eliminate the incentive

for each individual class member to file a separate action, thus

defeating the purpose of Fed. R. Civ. P. 23. Id.; see also

Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 350-51 (1983).

- 7 - PwC counters that the American Pipe tolling doctrine is

inapplicable because it was not named as a defendant in Tyco I,

and Tyco I makes no mention of PwC. According to PwC, American

Pipe tolling applies only with respect to subseguent actions that

are brought against the same defendants sued in the original

class action. See Arneil v. Ramsey, 550 F.2d 774, 782 n.10 (2d

Cir. 1977)(declining to extend the rule and noting that "nothing

in American Pipe suggests that the statute be suspended from

running in favor of a person not named as a defendant in the

class suit . . . . A different conclusion would not comport with

reason."); Anderson v. Cornejo, 1999 WL 258501, at *4 (N.D. 111.

Apr. 21, 1999)(concluding that the American Pipe rule does not

apply to parties who were not previously named as defendants in a

plaintiff class action unless it is a case involving a class of

defendants); Mott v. R.G. Dickinson & Co., 1993 WL 63445, at *5

(D. Kan. Feb. 24. 1993)(concluding that the American Pipe rule

only tolls the statute of limitations for putative class members

who were the same defendants in the prior action); In re Clinton

Oil Co. Sec. Litig., 1977 WL 1009, at *16 (D. Kan. Mar. 18,

1977)(noting that the language of American Pipe emphasized that

"notice to the defendants of the institution of the action would be necessary to the application of this tolling concept"); see

also Lindner Dividend Fund v. Ernst & Young, 880 F. Supp. 49, 53-

54 (D. Mass. 1995)(holding that the American Pipe tolling

doctrine could not be invoked against a defendant whose auditor

was originally named in the class action, but was dropped from

the amended complaint).2

Plaintiffs nonetheless urge that the American Pipe rule

should be extended to PwC because the claims set forth in the

original action are substantially similar to and involve the same

evidence and witnesses as the claims against PwC in the present

action. Further, plaintiffs contend that Tyco I put PwC on

notice that stockholder claimants were seeking relief under the

securities laws based on Tyco's fraudulent conduct.

Unfortunately for plaintiffs, the cases they cite in support

of extending the rule are easily distinguished. For example, in

2 I am not persuaded by plaintiffs' assertion that the cases cited by PwC are inapposite because in four of the cases (all except Lindner), the defendant lacked actual notice of the original class action whereas here, PwC did have actual notice of Tyco I . None of these cases even considers whether or not the defendant had actual notice of the original suit to which it was not a party. See Arneil, 550 F.2d at 782-83; Anderson, 1999 WL 258501, at 84; Mott, 19 93 WL 63445, at *5; Clinton Oil, 197 7 WL 1009, at *16. Becks v. Emery-Richardson, Inc. et al., the court applied the

American Pipe rule and tolled the statute of limitations against

AIG, even though AIG had not been named in the earlier class

action, because two of AIG's corporate subsidiaries had

themselves been named in that action. 1990 WL 303548, at *12

(S.D. Fla. Dec. 21, 1990). The "parental" relationship between

AIG and two of its subsidiaries persuaded the court that AIG was

the "control person" as to these subsidiaries and that

"constructive if not actual notice was given to AIG of this

litigation, so that AIG is not unreasonably included in this

action." Id. Those facts differ significantly from the

situation here, where PwC is not a member of Tyco's corporate

family. The Becks holding thus does not apply. Plaintiffs fail

to supply any other argument in favor of extending the American

Pipe rule to their case.3 I therefore decline to do so here.

3 The other cases cited by plaintiffs do not address the guestion of whether the American Pipe tolling rule should be extended to new defendants not named in the original class action. Rather, these cases address the guestion of whether American Pipe suspends the statute of limitations on claims that are similar, but not identical, to those in the original action. See Cullen v. Margiotta, 811 F.2d 698, 720-21 (2d Cir. 1987); Tosti v. City of Los Angeles, 754 F.2d 1485, 1489 (9th Cir. 1985); In re Linerboard Antitrust Litig., 223 F.R.D. 335, 351-52 (E.D. Pa. 2004); Barnebey v. E.F. Hutton & Co., 715 F. Supp.

- 10 - B. Plaintiffs' claims are not saved by the Sarbanes-Oxley Act

Plaintiffs next argue that their claims are saved by SOX's

five-year statute of repose even if the American Pipe tolling

doctrine does not apply. As an initial matter, because

plaintiffs' claim under § 11 of the Securities Act does not sound

in fraud and SOX applies only to fraud claims. The Act's

extended limitation and repose periods do not apply to

plaintiffs' § 11 claim.4 See In re FirstEnergy Corp. Sec.

Litig., 316 F. Supp. 2d 581, 601 (N.D. Ohio 2004); Lawrence E .

Jaffe Pension Plan v. Household Int'l, 2004 WL 574665, at *12 (D.

111. Mar. 22, 2004); In re Enron, 2004 WL 405886, at *11-12;

Friedman v. Rayovac Corp., 295 F. Supp. 2d 957, 974-75 (W.D. Wis.

2003); In re Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d

189, 196-97 (S.D.N.Y. 2003); In re WorldCom, Inc. Sec. Litig.,

294 F. Supp. 2d 431, 443-44 (S.D.N.Y. 2003).

1512, 1528 (M.D. Fla. 1989). As such, these cases do not advance plaintiffs' argument.

4 Plaintiffs expressly state in their complaint that their § 11 claim against PwC "does not sound in fraud" and that "[a]11 of the preceding allegations of fraud or fraudulent conduct and/or motive are specifically excluded from this Count." Compl. 5 237. Accordingly, they do not strenuously argue that SOX's extended periods should be applied to this claim.

- 11 - Plaintiffs' stronger argument is that SOX saves their §

1 0 (b) claim. The difficulty with this argument, however, is that

1 agree with the great weight of authority which holds that SOX

does not revive claims that become time-barred before the Act's

effective date. See Foss v. Bear, Stearns & Co., 394 F.3d 540,

542 (7th Cir. 2005)(holding that SOX does not revive time-barred

claims); In re Enterprise Mortgage Acceptance Co. Sec. Litig.,

391 F.3d 401, 406-10 (2d Cir. 2004)(same); Quaak v. Dexia, 2005

WL 352558, at *5 (D. Mass. Feb. 9, 2005)(same); Milano v. Perot

Systems Corp., 2004 WL 2360031, at *5-8 (N.D. Tex. Oct. 19,

2004)(same); Zouras v. Hallman, 2004 WL 2191034, at *15-16

(D.N.H. Sept. 30, 2004)(same); Zurich Capital Markets Inc. v.

Coglianese, 2004 WL 2191596, at *9 (N.D. 111. Sept. 23,

2004)(same); L-3 Communications Corp. v. Clevenger, 2004 WL

1941248, at *3-6 (E.D. Pa. Aug. 31, 2004)(same); In re WorldCom,

Inc. Sec. Litig., 2004 WL 1435356, at *6-7 (S.D.N.Y. June 28,

2004)(same); Lieberman v. Cambridge Partners, LLC, 2004 WL

1396750, at *3 (E.D. Pa. June 21, 2004) (same); In re ADC

Telecomm., Inc. Sec. Litig., 331 F. Supp. 2d 799, 801 (D. Minn.

2 004) (same); In re Enron Corp. Securities, Derivative & ERISA

Litig., 2004 WL 405886, at *17 (S.D. Tex. Feb. 25, 2004) (same);

- 12 - Glaser v. Enzo Biochem, Inc., 303 F. Supp. 2d 724, 733-34 (E.D.

Va. 2003)(same); In re Heritage Bond Litig., 289 F. Supp. 2d

1132, 1148 (C.D. Cal. 2003)(same); but see Roberts v. Dean Witter

Reynolds, 2003 WL 1936116 (M.D. Fla. Mar. 31, 2003) . Because

plaintiffs' § 1 0 (b) claim had already become time-barred when SOX

became effective, SOX does not save the claim from the three-year

statute of repose.

IV. CONCLUSION

For the reasons set forth above, I grant PwC's motion to

dismiss. (Doc. No. 308).

SO ORDERED.

Paul Barbadoro United States District Judge

April 22, 2 005

cc: Counsel of Record

- 13 -