Goldman Sachs, Citigroup and Merrill Lynch in Dismissal of Securities Fraud Case

September 2, 2005

Cleary Gottlieb won a dismissal of a federal securities class action against Goldman Sachs, Citigroup, and Merrill Lynch, lead underwriters in the IPO of Tyco International subsidiary, TyCom Ltd. The District of New Hampshire granted dismissal on September 2.

The action arose out of TyCom’s $2.24 billion IPO in January 2000. The plaintiffs alleged substantially overlapping claims under section 10(b) of the Securities Exchange Act of 1934 and section 11 of the Securities Act of 1933 against Tyco and several of its officers and directors, TyCom, and the underwriters.

All defendants moved to dismiss, arguing that the challenged statements in the prospectus were not actionable misstatements or omissions and that plaintiffs failed to plead scienter adequately. The underwriters also argued that allegations of analyst conflicts and false statements failed to meet the requirements of the Private Securities Litigation Reform Act of 1995.

In a 52-page decision, the court held that the complaint sufficiently alleged scienter and false statements by Tyco, TyCom and their officers. But the court dismissed the complaint as against the underwriters, holding that the complaint failed to allege facts to create a "strong inference of scienter" on the part of the underwriters, criticizing plaintiffs for impermissibly relying on "sweeping and conclusory" allegations that the underwriters "must have known" the true facts by virtue of their access to senior management, and for "unsubstantiated and conclusory assertions" that Citigroup's analyst, Jack Grubman, was the "engineer" of the scheme to defraud. The court also rejected all of plaintiffs' allegations of analyst conflicts, holding that the thirty paragraphs of the complaint devoted to alleged conflicts amounted to no more than that GS and Citigroup were the underwriters of the TyCom offering and that their analysts issued positive reports on TyCom. As for the substance of the analyst reports, the court found that plaintiffs had not alleged even a single fact to support their wholly conclusory allegation that the analysts disbelieved what they wrote.