In re Tycom Securities Litigation

In re Tycom Securities Litigation         MD-02-1335-PB 09/02/05

                      UNITED STATES DISTRICT COURT
                   FOR THE DISTRICT OF NEW HAMPSHIRE



Rosemarie Stumpf

     v.                                Case No.  03-CV-1352-PB
                                       MDL No.   02—MDL—1335—PB
                                       Opinion No. 

Neil R. Garvey, et a l .
Tin re TyCom Ltd. Securities Litigation!



                         MEMORANDUM AND ORDER

     This class action arises from a decision by Tyco

International Ltd. to sell off a minority interest in one of its

subsidiaries,    TyCom Ltd.   Plaintiffs purchased shares of TyCom

stock, either pursuant to a July 26, 2000 Registration Statement

and Prospectus    ("Prospectus")   for TyCom's initial public offering

("Offering"),    or on the open market between July 26, 2000

("Effective Date")    and December 17, 2001   ("Class Period").

Plaintiffs claim that defendants Tyco, TyCom, L. Dennis

Kozlowski, Mark H. Swartz,     and Neil R. Garvey devised a scheme to

fraudulently reap more than $200 million in cash from the July

26, 2000 offering of common shares in TyCom,      a wholly owned
subsidiary of Tyco.   Plaintiffs also claim that analysts employed

by the Underwriters of the Offering issued false reports in

furtherance of the scheme.

     Plaintiffs elaborate on their claim in their consolidated

complaint1 ("Complaint"), by alleging that the Prospectus was

materially false and misleading because it both misrepresented

that the demand for undersea fiber-optic cable bandwidth,   TyCom's

sole product, was increasing,   and failed to disclose that the

market for bandwidth was already saturated with unused capacity.

Plaintiffs allege that these materially false and misleading

statements fraudulently induced them to purchase TyCom stock at

an inflated price during the Class Period.    Plaintiffs also

charge that defendants continued their misconduct during the

Class Period by engaging in fraudulent revenue swaps to


     1 This case began as two separate actions filed in the
United States District Court for the District of New Jersey:
Stumpf v. Garvey, filed on July 24, 2003, and O'Louqhlin v.
Garvey, filed on September 26, 2003.  On October 30, 2003, the
Judicial Panel on Multidistrict Litigation ("MDL") issued a
Conditional Transfer Order transferring Stumpf v. Garvey to this
court pursuant to 

.  By order dated November 10,
2003--prior to date on which the MDL transfer order became final-
-the New Jersey District Court consolidated the two cases,
approved the parties' selection of lead counsel, and appointed
Mark Newby as lead plaintiff.  The consolidated complaint was
filed on December 13, 2004.

                                 -   2   -
artificially inflate the price of TyCom stock and boost the

company's profits.    According to plaintiffs,          the underwriters of

the TyCom Offering,    Goldman,   Sachs & Co.       ("Goldman Sachs"),

Citigroup Global Markets,     Inc.   (f/k/a Salomon Smith Barney

Inc.)("SSB"),   and Merrill Lynch, Pierce, Fenner & Smith

Incorporated    ("Merrill Lynch")    (collectively,      "Underwriters")

were complicit in this scheme,       failed to disclose conflicts of

interest,   and issued false statements in their analysts' reports

to inflate the value of TyCom stock.

     In Count I, plaintiffs assert claims against all defendants

based on § 11 of the Securities Act of 1933            ("Securities Act"),

 7 (k), and against Tyco and the individual defendants

based on § 15 of the Securities Act.             

(o).   In

Count II, plaintiffs assert claims against all defendants except

Merrill Lynch based on § 10(b) of the Securities and Exchange Act

of 1934   ("Exchange Act"),   15 U.S.C. § 78j(b),        and against Tyco

and the individual defendants based on § 20(a) of the Exchange

Act. 15 U.S.C. § 78t(a).      Defendants have moved to dismiss the

Complaint on a variety of grounds.2


     2 Tyco, TyCom, and Garvey filed a motion to dismiss the
Complaint (Doc. No. 384). Kozlowki filed a separate motion to

                                     -   3   -
                           I. BACKGROUND

A.   Tvco's Telecommunications Cable Business

     Prior to April 1997, Tyco manufactured undersea fiber optic

telecommunications cable in its Simplex Technologies unit.

Simplex's major customer was AT&T Submarine Systems Inc.       ("SSI"),

whose principal business was designing and laying undersea cable

systems to connect to land-based cable systems.        On April 11,

1997, Tyco and AT&T announced that they had entered into an

agreement for Tyco to acquire SSI.        Tyco explained that SSI would

operate in conjunction with its Simplex unit to become a fully

integrated manufacturer, designer,       and servicer of undersea fiber

optic cable systems.   Tyco completed the purchase on July 1,

1997, and renamed the new entity Tyco Submarine Systems Ltd.

Tyco Submarine was later renamed TyCom.       At the time, Tyco owned

100% of the stock in TyCom.

     Tyco's merger of Simplex and SSI was perfectly timed to




dismiss (Doc. No. 391), but joined in the legal arguments set
forth by Tyco, TyCom and Garvey.  Goldman Sachs, SSB, and Merrill
Lynch also filed a separate motion to dismiss (Doc. No. 392),
joining in Tyco's arguments and setting forth additional
arguments for dismissal.  I address the arguments presented in
all three motions.

                                -   4-
benefit from the growth in telecommunications companies that




                               -   5   -
sought to own undersea cable systems.                TyCom's revenue thus grew

from $375.5 million in fiscal 1997 to $1.28 billion in fiscal

year 1998, and $1.63 billion in fiscal year 1999.                TyCom's

revenue in the first six months of fiscal year 2000 was $1.27

billion.    This growth was fueled primarily by contracts with four

of TyCom's largest customers.      Level 3 Communications,

360networks,    Global Crossing,   and Flag Telecom.           These customers

raised cash to fund their operations through a series of public

offerings in which the Underwriters were participants.

B.   Tvco's Decision to Sell Off a Minority Interest of TyCom

     After an open-house for telecommunications research analysts

in the fall of 1999, TyCom's management decided to sell off a

minority interest in the company and construct the TyCom Global

Network    ("TGN").   The company later conducted "town hall

meetings" at TyCom's various locations to increase its employees'

awareness of the TyCom Offering.                TyCom senior marketing

director,   James F. Brennan, who in 1990 had been convicted of

bank fraud, played a central role in the Offering.3



     3 The First Circuit Court of Appeals affirmed Brennan's
bank fraud conviction.      See United States v. Brennan. 

 (1st C i r . 1993) .

                                    -   6   -
C.   Pre-Offering Demand For Undersea Bandwidth

     Most of the cable that TyCom and other companies installed

in 1999 and 2000 was unused "dark fiber" at the time of the

Offering.   "Dark fiber," as opposed to "lit fiber," is fiber that

is laid undersea, but has not yet been connected to land, often

due to a lack of demand.    Based on a massive build-out of

capacity by Global Crossing,    360networks,   and Level 3, there was

sufficient bandwidth capacity to meet anticipated future demand

several times over.   In fact, at the time of the Offering,      the

only demand for capacity on the TGN was from companies such as

Qwest, Global Crossing,    and Level 3, who themselves had excess

bandwidth capacity, but were interested in "swapping" their

excess capacity for capacity on the TGN.4      Furthermore,   those



      4 "Swaps" are reciprocal transactions in which two
telecommunications companies exchange capacity on each other's
network.   Swaps "may be entered into for legitimate reasons, i.e.
to acquire access on networks in a market that a company wishes
to enter in exchange for capacity that has yet to be sold and is
not otherwise in use ('dark fiber').   However, swap transactions
can also be [used] by a company seeking to defraud investors or
its creditors to create the impression that the company is
selling capacity when it is merely unloading useless dark fiber
on one of its networks in exchange for useless dark fiber on a
competitor's network," thereby inflating the company's bottom
line.   In re Flag Telecom Holdings. Ltd. Sec. Litig.. 

 (S.D.N.Y. 2005)("Flag II" ) .

                                  -   7
                                      -
companies treated the capacity transferred in swap transactions

as revenue-producing sales, even though no money changed hands.

     According to a senior director of global sales at TyCom

("Employee E"), the company's network engineers and other

employees involved in designing the TGN were "queasy" about the

lack of sufficient market demand to support an additional global

network,    and therefore strongly advised against the spin-off.

Compl. 5 74.    According to Employee E, at the time of the

Offering, bandwidth capacity had already surpassed demand and the

price of bandwidth was plummeting.     I d . 5 75.    Another TyCom

employee,    a shore-end installation engineer   ("Employee G"), who

was responsible for installing submarine and terrestrial fiber

optic cable systems,    including the TGN, stated that in the late

1990s there was "more than enough capacity."         I d . 5 78.   He added

that concerns within TyCom and Tyco about waning demand and

excess bandwidth capacity were not disclosed to the public,           and

instead,    TyCom's marketing and sales division "continued to

forecast a huge market" to potential investors.         I d . 5 79.

     A former director of technology for TyCom ("Employee I")

similarly stated that concern over bandwidth demand at the time

of the Offering was widely expressed among TyCom employees.
Compl. 5 84.      TyCom's deputy director of global sales from 1997

to 2004    ("Employee D") stated that despite the efforts of the

sales staff, coupled with almost weekly price reductions, no

bandwidth was sold from the beginning of 2000 until the middle of

2001.     I d . 5 85.   TyCom's executives,     including Garvey, were well

aware that no sales of bandwidth had been made immediately prior

to the Offering and that there were few expressions of interest

from potential customers.        I d . 5 86.    A terminal engineer

("Employee J") responsible for activating cables,             and hence

available bandwidth,       stated that in many of the terminals only

1/32 of the capacity was being utilized and that TyCom was

absorbing cancellations in contracts by assuming ownership of the

capacity that had been installed and completed.              I d . 5 87.

D.      TyCom's Public Offering

        On January 17, 2000, Tyco announced that,          in response to

rapidly increasing market demand for undersea bandwidth,               it

planned to develop TyCom into a publicly traded company for the

purpose of designing, building,           installing,   operating,   and

maintaining its own global undersea fiber-optic communications

network.     Compl. 5 97.     The TGN was to be the "largest and most



                                      -   9-
advanced global undersea telecommunications fiber optic network."

   Tyco common stock rose by $5,125 per share the next day,                    in

part due to investor enthusiasm for the proposed offering.                      

 5

98.   On July 26, 2000, TyCom filed an amended Registration

Statement and final Prospectus with the Securities and Exchange

Commission   ("SEC")    for the initial offering of 61,130,435 shares

of TyCom common stock at $32 per share.                 I d . 5 99.   Goldman

Sachs,   SSB, and Merrill Lynch were the co-lead underwriters of

the Offering.    I d . 5 101.    Tyco planned to sell 14% of its

interest in TyCom.       I d . 5 102.

      The Prospectus represented that $1,654,115,224 of the

$1,854,115,000 in estimated net proceeds from the Offering would

be used "toward the deployment of the first phase of the TyCom

Global Network."       Compl. 5 100.         According to the Prospectus,        the

principal elements of TyCom's business strategy were to deploy

the TGN to address increasing demand,                transform into a provider

of undersea bandwidth services,             and deliver customer-driven

network solutions.       I d . 5 108.       The Prospectus added that the TGN

was likely to be successful because, based on research conducted

by the Yankee Group, global demand for undersea bandwidth

capacity on the transatlantic route was expected to increase "at

                                        -   10   -
a compound annual growth rate of approximately 123% from 2000

through 2005," and demand on the transpacific route was expected

to "increase at a compound annual growth rate of 129%" over the

same period.    I d . 5 109.

E.   The Yankee Group Forecasts

     Prior to the Offering,          TyCom sent a Request for Quotation

("RFQ") to the Yankee Group,          a telecommunications and networking

research and consulting firm, asking for the preparation of "a

demand analysis for various traffic destinations" for the period

from 2000 through 2009.        Compl. 5 90.         In the RFQ, TyCom informed

the Yankee Group that "[TyCom] had already completed a basic

Global Supply and Demand-side analysis" and that it "would like

[the Yankee Group] to use this analysis as a starting point" for

its own analysis.     

      The RFQ emphasized that "the Yankee

Group's final presentation is expected to be a validation of

previous   [TyCom] efforts      . . . intended to serve       [in anticipated

SEC filings]   as an objective third-party view of global demand

for network capacity."5        

    The RFQ was "carbon copied" to


     5 The RFQ further stated that after the Yankee Group
performed its "own demand analysis," it would be required to
"evaluate the [TyCom] Demand model and projections, and then
render an assessment as to its approach and consolidations" and

                                       -   11   -
members of TyCom's senior management,        including Andrew Kowalik,

TyCom's head of strategic information.          I d . 5 92.

     Employee H, a former global forecast analyst who worked for

TyCom from 1998 to 2002,   learned from Kowalik that the Yankee

Group's forecasts predicted much larger demand growth than

TyCom's internal analyses because the Yankee Group had relied on

TyCom's falsely inflated projections.6         Compl. 5 93.     In February

2000, TyCom's "Final View" of the market projected that demand

for the transatlantic routes would increase at an average of

51.25% per year between 2001 and 2005.          I d . 5 94.   Similarly,

demand for the transpacific routes for the same period was

projected to increase yearly by an average of 81.25%.             

   The

Yankee Group's demand projections for the same period were

significantly higher:   it projected 71% average annual growth in

the transatlantic region and 85.75% average annual growth in the


"improve its own model if warranted.         . . ."   Compl. 5 91.

     6 Employee H also alleges that Kowalik told her that the
Underwriters had explained to him and other senior TyCom
executives what the sales and revenue projections had to be in
order to induce investors to buy shares of TyCom and then
instructed Kowalik to "come back with the numbers to support
those forecasts." According to Employee H, Kowalik then reported
these "falsely inflated demand numbers" to the Yankee Group.
Compl.    88-89.

                                -   12   -
transpacific region.     I d . 5 95.       Employee B indicated that the

Yankee Group's projections were inflated by the inclusion of non­

revenue-producing reciprocal bandwidth swaps and did not reflect

actual end-user demand.     I d . 5 96.

F.      Post-Offering Trading in TyCom Stock

        On July 27, 2000, TyCom stock rose by $4.52 per share as

investors reacted positively to the Offering.               Compl. 5 195.

Beginning on August 21, 2000, the Underwriters commenced analyst

coverage of TyCom.7    I d . 5 197.        Craig Irvine of Merrill Lynch

initiated coverage of TyCom with a near-term rating of

"accumulate," a long-term rating of "buy," and a 12-to 18-month

target price of $60 per share.            I d . 5 198.   Irvine reiterated

this rating on October 7, 2000.            

     Similarly, Frank Governali

of Goldman Sachs initiated coverage of TyCom with a rating of

"recommend list" and a 12-month target price of $60 per share.

I d . 5 199.   Governali reiterated his "recommend list" rating and

the $60 price per share in his October 18, 2000 report.               

 5

207 .



     7 Under SEC regulations, the Underwriters were prohibited
from issuing research reports for twenty-five days following the
Offering.

                                      -   13   -
     Jack Grubman of SSB echoed these ratings,                initiating

coverage with a "Speculative Buy" rating and a 12 to 18 month

target price of $75 per share.       Compl. 5 200.            Grubman estimated

that during the fiscal year ending September 2000, TyCom's

revenue would grow by 55.3% to $2.3 billion.                

   He added that

demand for undersea bandwidth was expected to exceed supply and

that TyCom was an attractive investment.              

     In response to the August 21, 2000 analyst coverage,                  TyCom

stock closed on August 21, 2000 at $42,875, up from the previous

day's close of $37.75,   on volume that was approximately three

times the prior week's average daily volume.                Compl. 5 206.

TyCom stock closed at a high of $45,438 on September 1, 2000.

 I 207.

     On January 16, 2001, TyCom announced a "major" $82.5 million

capacity sale on the transatlantic route of the TGN to DishnetDSL

Limited of India   ("DishnetDSL").            Compl. 5 208.     The following

day, TyCom announced its financial results for the quarter ending

December 31, 2000, and reported that the company's "strong

earnings" were "driven by the supply of third-party systems and

sales of capacity on the TGN."       I d . 5 209.       On February 23, 2001,



                                 -   14   -
TyCom issued a press release stating that "the transatlantic

portion of the TyCom Global Network              (TGN), scheduled to be placed

in service in July 2001, will have its capacity increased sooner

than planned to meet demand for larger bandwidth increments,

including wavelengths."       I d . 5 212.

      Likewise,   in an April 18, 2001 press release,            TyCom

announced capacity sales on both the transatlantic and

transpacific routes.      Compl. 5 214.          TyCom shares rose by $3.72,

or 26%, to $18.25 per share in response to this news.                 I d . 5 215.

On April 26, 2001, Governali reiterated his "recommend list"

rating of TyCom stock, but reduced the price target to $40 per

share.    I d . 5 250.   TyCom made similar announcements related to

capacity sales in May, June, July, and August 2001.                 

      216-

22.   TyCom attributed its strong performance during this period

to its ability to generate capacity sales.              

    In his July 18,

2001 report, Grubman reiterated his "buy" rating for TyCom stock.

I d . 5 190.   Several weeks later, however,          in his August 8, 2001

report, Grubman downgraded TyCom to "neutral."                I d . 5 254.

G.    TyCom's Swap Transactions

      According to Employee K, a senior manager of terminal



                                    -   15   -
commissioning and network design,             TyCom was swapping capacity on

the TGN with capacity on other carrier networks and recognizing

these swaps as revenue,   in violation of Generally Accepted

Accounting Principles   ("GAAP"), particularly Accounting

Principles Board Opinion No. 29 ("APB No. 29").8              Compl. 5 227.

Employee H confirmed that TyCom would take a large block of dark

fiber and exchange it for dark fiber on another company's

proposed cable network.    I d . 5 228.          Similarly, Employee C,

project manager at TyCom's Morristown, New Jersey facility,

reported that TyCom swapped capacity without the auditors'

knowledge in an effort to boost revenue.9             I d . 5 229.

     An internal company document establishes that the purported

sale to Dishnet announced on January 16, 2001 was in fact a swap

of capacity,   and indicated that DishnetDSL was not carrying


     8 APB No. 29 requires that exchanges of non-monetary assets
be accounted for by calculating the fair value of the asset given
up or the asset received, whichever is more readily determinable.
See In re Flag Telecom Holdings. Ltd. Sec. Litig.. 

 (S.D.N.Y. 2004)("Flag I" ) .

     9 According to Employee B, during the fourth quarter of
fiscal year 2001, TyCom discussed appropriate accounting
treatment of its bandwidth swaps with its outside auditor
PricewaterhouseCoopers ("PwC").   PwC informed TyCom that it would
not issue an opinion letter on TyCom's financial statements
classifying the swaps as revenue.   Compl. 5 257.

                                 -   16   -
traffic.   Compl. 5 230.    Moreover,             the same document reveals that

TyCom also engaged in capacity swaps with Qwest and Emergia and

the total value of all non-swap lease transactions through mid-

September 2002 was only $3, 436, 651.               Id.    231-32.

H.   TyCom's Stock Prices Fall

     From a high price of $45.4375 on September 1, 2000, TyCom's

stock began a long decline in value to a low closing price of

$7.41 on September 27, 2001, as a result of a series of partial

disclosures concerning reduced demand,                oversupply,    and declining

prices for bandwidth.      Compl. 5 243.            An article titled "Trouble

in Octopus Garden," in the March 1, 2001 edition of America's

Network,   attributed the decline in the price of TyCom stock to

the oversupply of bandwidth and the resulting plummeting prices,

and cautioned that TyCom was running the "risk of running itself

into the ground."10   I d . 5 244.       TyCom stock closed at $18.04 per

share the next day, after having traded as high as $25.09 the

week before,   and the company announced that it would buy back as



     10 On March 1, 2001, TyCom competitor 360networks reported
that it had lost $355 million, or 55 cents per share, for the
year that ended December 31, 2000.  Accordingly, 360networks
announced that it was scaling back its forecasts for profit,
revenue, and capital spending.  Compl. 5 245.

                                     -   17   -
much as $500 million in common stock on the open market.         Id.

246-47.    TyCom's buy-back temporarily buoyed the price per share,

but the decline soon resumed,       and TyCom stock closed at $9.99 on

April 4, 2001.     Id.    248-49.

      Similarly,   a June 22, 2001 article in The Wall Street

Journal Online reported that prices for bandwidth were falling

"as much as 60%" and that the "amount of underused long-haul

fiber capacity in the U.S. is about 97%."        Compl. 5 253.

      On October 4, 2001, Tyco announced an initial offer to

exchange the TyCom shares it did not already own at an exchange

rate of .2997 shares of Tyco common stock per share of TyCom

stock.    Compl. 5 258.   Before trading opened on October 19, 2001,

Tyco and TyCom announced that they had entered into a definitive

agreement whereby a Tyco subsidiary would reacquire the

outstanding minority interest in TyCom at a ratio of .3133 shares

of Tyco common stock for every outstanding share of TyCom stock.

I d . 5 260.   On December 17, 2001, the date of the merger,     Tyco

common stock closed at $55.80 per share, making the effective

acquisition price of the merger $17.48 per share.        I d . 5 261.

Employee B suspects that Tyco acquired the minority interest in



                                    -   18   -
TyCom to avoid having TyCom issue separate audited financial

statements that would have revealed the lack of demand for

TyCom's bandwidth and the extent to which the purported swap

transactions did not qualify for revenue recognition under GAAP.

Id. I 262.



                        II.   STANDARD OF REVIEW

     Defendants challenge the Complaint pursuant to Rules

12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the

Private Securities Litigation Reform Act              ("PSLRA"),    15 U.S.C. §

78u-4(b).    When considering a motion to dismiss pursuant to Rule

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.. 

 (1st Cir.

1999)(citing Gross v. Summa Four.              Inc.. 

   (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 Equip. Corp..

   (1st Cir. 1996)(quoting Wash. Legal Found, v.



                                  -   19   -
Mass. Bar Found., 

      (1st Cir. 1993)).   A well-

pleaded complaint must contain "factual allegations        . . .

respecting each material element necessary to sustain recovery




                              -   20   -
under some actionable legal theory."             Classman v. Computervision

Corp., 

    (1st Cir. 1996)(internal quotations and

citations omitted).     A motion to dismiss under Rule 12(b)(6)

should not be granted unless it "presents no set of facts

justifying recovery."     Cooperman. 

 (citing

Dartmouth Review v. Dartmouth Coll.. 

 (1st Cir.

1989) ) .

      Special pleading requirements apply to fraud claims.               Fed.

R. Civ. P. 9(b) states that "[i]n all averments of fraud or

mistake,    the circumstances constituting fraud or mistake shall be

stated with particularity."       "Rule 9(b) also requires that a

plaintiff's averments of fraud specify the time, place,            and

content of the alleged false or fraudulent misrepresentations."

United States ex rel. Karvelas v. Melrose-Wakefield H o s p ., 36 0

F.3d 220, 226    (1st Cir. 2004).       Moreover, when a cause of action

sounding in fraud is based on "information and belief," Rule 9(b)

requires the plaintiff to plead sufficient supporting facts to

permit a conclusion that the alleged belief is reasonable.                See

   In contrast,   "[mjalice,   intent, knowledge and other

conditions of minds or a person may be averred generally."                Fed.



                                    -   21   -
R. Civ. P. 9(b).

      A plaintiff who alleges securities fraud under § 10(b) of

the Exchange Act must also satisfy the heightened pleading

standards of the PSLRA.       To plead a material misrepresentation or

omission under the PSLRA the complaint must "specify each

statement alleged to have been misleading,                  the reason or reasons

why the statement is misleading,            and, if an allegation regarding

the statement is made on ■'information and belief,'’ the complaint

shall state with particularity all facts on which the belief is

formed."   15 U.S.C. § 78u-4(b)(l).                  To be actionable as

securities fraud,     "the statements alleged to be misleading must

be misleading to a material degree."                   In re Cabletron Sv s ., Inc..

 (1st Cir. 2002).                   A fact is material "if it is

substantially likely 'that the disclosure of the omitted fact

would have been viewed by the reasonable investor as having

significantly altered the total mix of information made

available.'’"    I d . at 34 (quoting Basic Inc. v. Levinson. 

     (1988)).   Finally,       the PSLRA requires that a

securities fraud claim plead facts with particularity that are

sufficient to give rise to a "strong inference" of scienter.                      15



                                      -   22   -
U.S.C. § 78u-4(b) (2) .




                          -   23   -
     Section 11 of the Securities Act creates a right of action

for damages by securities purchasers when registration statements

contain untrue statements of material fact or material omissions,

and plaintiffs can trace their shares to those registration

statements.    15 U.S.C. § 77k(a).             Because fraud is not an

essential element of a § 11 claim,              a plaintiff asserting such a

claim typically need only satisfy the liberal pleading

requirements of Fed. R. Civ. P. 8(a).               See Giarraputo v.

UnumProvident Corp.. 

,              *9 (D. Me. Nov.   8, 2000).

Furthermore, unlike § 10(b), § 11 does not require an allegation

of scienter.



                           Ill.       ANALYSIS

     Defendants have launched a multi-pronged attack on the

sufficiency of the Complaint.         I evaluate the merits of each

argument in turn.

A.   Section 1 0 (b)

     Although the Complaint includes many allegations that mirror

those offered by the Lead Plaintiffs in the Tyco securities

action pending in this court,     see In re Tyco Int'l Ltd. Sec.



                                  -   24   -
Litig., 

       (Oct. 14, 2004)("Tyco II"), the core

allegations in this case, and those challenged most vigorously by

defendants,    are that    (1) TyCom publicly represented that demand

for bandwidth was "increasing" and was expected to continue to

increase, even though TyCom knew that the existing supply of

available bandwidth greatly exceeded demand projections;          (2)

TyCom failed to account for improper, non-revenue-producing swap

transactions; and (3) analysts employed by the Underwriters

issued materially false and misleading reports on TyCom and other

telecommunications companies.           I consider these arguments in

light of the PSLRA's pleading requirements.

     1.   The Tyco Defendants11

          a.      Failure to Plead False Statements or Omissions

                  (i)     Statements Concerning Demand for Bandwidth

     The Tyco Defendants,       in an argument joined by the

Underwriters,    first contend that the § 10(b) claim premised on

the demand for bandwidth demand should be dismissed because

plaintiffs have failed to plead facts demonstrating that the

statements in the Prospectus concerning bandwidth were untrue


     11 The Tyco Defendants include Tyco, TyCom, Garvey,
Kozlowski, and Swartz.

                                    -   25   -
when they were made.    They further argue that, even if plaintiffs

adequately alleged that the statements were false when made,      such

statements are not actionable.       Neither argument is persuasive.

       First, plaintiffs have adequately alleged that the statement

in the Prospectus that TyCom would deploy the TGN to "address the

increasing demand for undersea fiber optic bandwidth" and other

statements related to bandwidth demand were materially false and

misleading.    The Complaint charges that TyCom knew at the time of

the Offering both that any anticipated increase in bandwidth

demand would be insignificant when compared to the market's

already-existing oversupply,   and that the gap between demand and

supply would be more pronounced if TyCom were to complete the

TGN.

       Plaintiffs support their position by citing to the

statements of several former TyCom employees who were involved

with the Offering and development of the TGN.       For example, these

former employees state that "most of the fiber that was laid by

TyCom and other companies in 1999 and 2000 was dark at the time

of the Offering and awaiting demand for capacity," that "the only

demand that TyCom experienced for the TGN at the time of the



                                 -   26   -
Offering was from companies    . . . [that] themselves had excess

capacity and were interested in ■'swapping' their excess capacity

for capacity on the TGN," and that "there were multiples of

sufficient bandwidth capacity to meet future demand."        Compl.

70-71,   73.   The former employees add that only 1/32 of the

capacity was being used and the price of bandwidth was rapidly

declining.     These allegations are more than sufficient to

establish that at the time of the Offering,       statements that

demand was increasing were materially false and misleading.

     Furthermore,    I am not persuaded by the argument that

defendants' statements concerning the demand for bandwidth are

non-actionable "puffery," and are further rendered immaterial by

the "bespeaks caution" doctrine,      such that a reasonable investor

would not have relied on the identified statements concerning the

demand for bandwidth in light of the extensive and detailed

cautionary language in the Prospectus.        Although courts have

refused to find "material" as a matter of law "loosely optimistic

statements that are so vague,    so lacking in specificity . . .

that no reasonable investor" would rely on them,       Shaw. 

, the statements at issue here are not merely vague



                                 -   27   -
statements of hope.        See In re Boston Tech.             Inc. Sec. Litig.. 

 (D. Mass.        1998).          Rather,   they are specific

and concrete statements concerning the market for bandwidth

demand.     See i d .   They are therefore actionable under § 10(b).

See i d .   Additionally,     the First Circuit has held that the

"bespeaks caution" defense applies only to forward-looking

statements and is inapplicable where,                as in this case, the

statements at issue include false or misleading representations

of present fact.        See In re Stone & Webster.             Inc..   Sec. Litig..

       (1st Cir. 2005).           Here, the Prospectus falsely

represented that the TyCom Offering and related implementation of

the TGN was undertaken to "address the increasing demand for

undersea fiber optic bandwidth" existing in the

telecommunications market at the time of the Offering.                     Compl. 5

108.   This statement and other similar statements in the

Prospectus are representations of the then-existing state of the

bandwidth market and are conceivably in direct contradiction to

TyCom's alleged knowledge that bandwidth capacity already far

exceeded demand.        Id.     117-19.

       I thus conclude that TyCom represented in the Prospectus



                                     -    28   -
that demand for bandwidth capacity was growing at the time of the

Offering and that plaintiffs have adequately pleaded facts

demonstrating that these statements were false when made.         I

further conclude that the cautionary language in the Prospectus

is insufficient to have rendered the statements concerning

bandwidth non-actionable.

               (ii) Improper Swap Transactions

     The Tyco Defendants similarly challenge the § 10(b) claims

based on reciprocal swap transactions,        arguing that these claims

should be dismissed because plaintiffs have failed to plead facts

showing that these transactions were improper.

     As the court in Flag II explained,        reciprocal swap

transactions are improper when a company "is merely unloading

useless dark fiber on one of its networks in exchange for useless

dark fiber on a competitor's network," thereby falsely inflating

the company's bottom line.    

.       Plaintiffs

allege that after the Offering, defendants misrepresented that

TyCom had entered into contracts for sale of capacity on the TGN

totaling approximately $560 million.         Compl.    208-22.

According to plaintiffs,   these contracts consisted almost



                                -   29   -
entirely of reciprocal swaps with other telecommunications

companies that did not qualify for revenue recognition.             I d . 226-

29.   In particular, plaintiffs identify three separate improper

swaps that TyCom misrepresented as "sales" qualifying for revenue

recognition:    DishnetDSL   ($82.5 million); Qwest        ($140 million);

and Emergia    ($40 million).   

      Plaintiffs support these allegations with statements from

four former TyCom employees and an internal TyCom document.

Exhibit B, which identifies three multi-million-dollar

transactions as improper swaps.        For example, with respect to the

DishnetDSL and Qwest transactions. Exhibit B indicates

"[cjustomer not carrying traffic."             Likewise, with respect to

the Qwest and Emergia transactions. Exhibit B notes that the

deals involved exchanges for capacity.            Moreover, Exhibit B

indicates that the DishnetDSL transaction was a "swap type deal

to show revenue."     Plaintiffs further allege that during the

fourth quarter of fiscal 2001, TyCom's auditor, PwC, refused to

issue an opinion letter on TyCom financial statements that

classified TyCom's reciprocal swap transactions as revenue.

Compl. 5 257; see also Compl. 5 234            (pointing to an e-mail quoted



                                  -   30   -
in the Global Crossing complaint,            02 Civ. 910(GEL)(S.D.N.Y.),

indicating TyCom's willingness to participate in fraudulent

transactions intended to inflate its reported financial results).

Finally,   as plaintiffs point out, TyCom acknowledged in its Form

10-K for the year ending September 30, 2003 that total TyCom net

revenue for its TGN business in fiscal year 2001 was only $1.7

million--substantially below defendants' representation during

the Class Period.

     I therefore conclude that the plaintiffs have met the

PSLRA's requirement that a claimant plead with particularity

defendants' false and misleading statements by describing the

improper reciprocal swaps entered into to artificially inflate

revenue.    See Flag II, 

          (noting also that

plaintiff pled facts demonstrating that many companies were

inflating revenues by entering into improper reciprocal swap

transactions).

           b.    Scienter

     The Tyco Defendants,   joined by the Underwriters, next argue

that plaintiffs' § 10(b) claim concerning the demand for

bandwidth and swap transactions should be dismissed for failure



                                -   31   -
to plead facts giving       rise to a "strong"       inference of scienter,

as is required by the PSLRA.

     "Liability under section 10(b) and Rule 10b-5 . . . requires

scienter,   a mental state embracing intent to deceive, manipulate

or defraud."     Cabletron. 

      (internal quotation marks

omitted).     To prove scienter,   "a plaintiff must show either that

the defendant[s]    consciously intended to defraud,      or that they

acted with a high degree of recklessness."          Stone & Webster. 

    (internal    quotation marks omitted);    see Cabletron.

    (explaining that      scienter     also "mayextend to a

form of extreme recklessness that /is closer to a lesser form of

intent'")   (citation omitted).        In the First Circuit, there is no

"rigid formula for pleading scienter," and courts employ a

"■'fact-specific approach' that proceeds case by case."          

(citation omitted).        Accordingly, while scienter can be

established through direct evidence of "conscious wrongdoing," a

plaintiff may also "combine various facts and circumstances

indicating fraudulent intent--including those demonstrating

motive and opportunity--to satisfy the scienter requirement."

Aldridge v. A.T. Cross Corp.. 

 (1st Cir. 2002).



                                   -   32   -
     The Complaint's allegations concerning demand for bandwidth

and those concerning the improper reciprocal swap transactions

are interrelated and interdependent.           In effect, plaintiffs

allege that the improper swap transactions were used to falsely

inflate TyCom's revenue, thus propping up stock prices,          in order

to perpetuate the fraudulent scheme that was initiated when

defendants misrepresented the market for undersea bandwidth prior

to the Offering.   As a result,       the facts plaintiffs offer to

support a strong inference of scienter with respect to the claims

premised on demand for bandwidth apply with equal force to

support a strong inference of scienter with respect to the

improper swap transactions.12

     Plaintiffs have identified several factors that, taken

together,   are sufficient to support a strong inference that Tyco,

TyCom, and the individual defendants acted with scienter.              First,

plaintiffs allege that the underlying motive for the TyCom

Offering was to allow Kozlowski and Swartz to personally profit


     12 The Underwriters are in a different position.
Plaintiffs have not provided sufficient facts to support a strong
inference that the Underwriters acted with scienter with respect
to the improper swap transactions.  In fact, plaintiffs fail to
allege that the Underwriters were aware of these transactions at
all.

                                  -   33   -
and to generate funds to forgive unauthorized,            interest-free

loans that they had obtained from Tyco.             Plaintiffs combine these

allegations of motive and opportunity with claims that

defendants,   armed with knowledge of the imbalance between the

demand for and supply of bandwidth,            falsified internal demand

projections and enlisted the Yankee Group to use these

artificially inflated projections to provide an "objective third-

party view of global demand for network capacity" intended for

use in SEC filings that themselves were false.             They add that

TyCom engaged in improper swap transactions with other bandwidth

providers to further perpetuate the fraud.             Finally, plaintiffs

allege that the individual defendants engaged in unusual trading

of Tyco stock at suspicious times.             Collectively,   these

allegations plead enough culpable facts to support the strong

inference that the individual defendants acted with scienter.

This inference can be imputed to Tyco and TyCom as well.

     The Underwriters, however,       are in a different position.

First, plaintiffs impermissibly group together Merrill Lynch,

Goldman Sachs, and SSB in their allegations,            claiming that the

"Underwriter Defendants" instructed Kowalik to falsify TyCom's



                                  -   34   -
projections of market demand.         Compl.         88-89.   123, 204.   Under

the PSLRA,   a plaintiff is required to plead particularized facts

that support a strong inference of scienter with respect to each

defendant.     See In re Cross Media Mktg. Corp. Sec. Litig.. 

    (S.D.N.Y. 2004)(dismissing claim where

complaint "d[id] not adequately plead that each Defendant acted

with /the required state of mind'’"); Tyco II, 

(noting that the group pleading doctrine "does not relieve a

plaintiff of the duty to plead sufficient facts as to each

defendant to support a strong inference that the defendant acted

with scienter")(emphasis added).

     Second, plaintiffs allege that Goldman Sachs analyst

Governali and SSB analyst Grubman              knew that there was no demand

for bandwidth "by virtue of their              access to senior TyCom

management prior to and after the              Offering, and their

relationship with the other large              bandwidth companies in the

industry."     Compl. 5 204.   However,        sweeping and conclusory

allegations that a defendant "must have known" the facts giving

rise to an alleged fraud are insufficient to sustain an inference

of scienter.     See, e.g.. Maldonado v. Dominquez. 

, 10



                                  -   35   -
(1st Cir. 1998)(finding generalized imputations of knowledge

insufficient); Orton v. Parametric Tech. Corp.. 

   (D. Mass. 2004)(rejecting "vague assertion that a

defendant must have known about the fraud by virtue of his

position of authority" to plead a strong inference of scienter).

     Finally, plaintiffs'’ unsubstantiated and conclusory

assertions that Grubman was the "engineer" of TyCom's "scheme,"

Compl. 5 7, and that he worked with TyCom executives to "devise[]

a new business plan" for TyCom,       i d . 5 8, are similarly

insufficient to support a strong inference of scienter.

Plaintiffs' allegations that at an open-house Grubman told Garvey

that Tyco could sell off a minority interest in TyCom and "retain

the profit" from a fiber-optics network and that they should "get

a handle on the company's hidden value" and "turn all of it into

gold," i d . 5 54, demonstrate only that Grubman was optimistic

about TyCom's ability to succeed and be profitable in the

telecommunications market.   I therefore conclude that plaintiffs

have not pleaded sufficient facts to demonstrate that the

Underwriters acted with scienter with respect to the claims

involving the demand for bandwidth.



                                  -   36   -
            c.    Loss Causation

     The Tyco Defendants' next argument in favor of dismissal of

the § 10(b) claim is that even if plaintiffs have adequately

pleaded actionable misstatements and scienter, their § 10(b)

claim must nevertheless be dismissed because they have failed to

adequately plead loss causation.13                 To survive a Rule 12(b)(6)

challenge to a § 10(b) claim,         a plaintiff must allege that "the

act or omission of the defendant alleged to violate                 [§ 10(b)]

caused the loss for which the plaintiff seeks to recover

d a m a g e s 15 U.S.C. § 78u-4(b)(4);             see Dura Pharms.. Inc. v.

Broudo,   125 S. C t . 1627,   1631   (2005)(defining loss causation as a

"causal connection between the material misrepresentation and the

loss").    Hence, to properly plead loss causation,               a plaintiff

must allege "that the misstatement or omission concealed

something from the market that, when disclosed, negatively

affected the value of the security."                 Lentell v. Merrill Lynch &



     13 Defendants also contend that plaintiffs' failure to
properly plead loss causation with respect to the Exchange Act
claims establishes their affirmative defense of "no loss
causation" with respect to the § 11 and §15 claims.  See, e.g..
In re DNAP Sec. Litig.. 

, at *3 (N.D. C a l . Sep.
14, 2000)(dismissing claim, noting loss causation is an
affirmative defense that may be raised on a motion to dismiss).

                                      -   37   -
Co.. 396 F .3d 161,   173   (2d Cir. 2005).

     As the Supreme Court recently explained, plaintiffs cannot

adequately plead loss causation merely by alleging that they

purchased securities at artificially inflated prices.               Dura

Pharms., 125 S. C t . at 1630.     Rather,        a plaintiff must show that

he "suffered an economic loss fairly attributable to the public

airing of the alleged fraud."          D.E. & J P.P. v. Conaway. 

   (E.D. Mich. 2003), a f f fd . 

(6th Cir. June 10, 2005)(unpublished).

     Defendants argue that plaintiffs have failed to point to any

corrective disclosure followed by an immediate drop in the price

of TyCom stock, and, as a result, the only reasonable inference

that can be drawn from the Complaint is that any decline in price

during the class period was caused by the crash of the

telecommunications market.       Plaintiffs respond that they have

satisfied the pleading requirement by alleging that "defendants'

fraudulent misrepresentations and omissions caused the price of

TyCom stock to be artificially inflated,              so that when, over time,

the true facts came out regarding TyCom's prospects and the state

of demand for bandwidth generally,              facts that were at odds with



                                   -   38   -
defendants' prior representations,                 the stock lost value and

investors suffered a loss."         Pis.' Opp. to Issuer Defs.' Mot. to

Dismiss at 51.       I agree.

     In Dura, the Supreme Court explained that a plaintiff's

allegations of loss causation under § 10(b) are only subject to

the pleading standards of Fed. R. Civ. P. 8(a)(2) requiring "a

short and plain statement of the claim showing that the pleader

is entitled to relief."         125 S. C t . at 1634.         The Court further

explained that because "ordinary pleading rules are not meant to

impose a great burden upon a plaintiff," it "should not prove

burdensome     ...   to provide a defendant with some indication of

the loss and the causal connection that the plaintiff has in

mind."   Id.

     Here, plaintiffs allege that, based on defendants'

fraudulent misrepresentations,            they purchased TyCom stock at an

artificially high price.         They further allege that when the truth

surfaced regarding the glut of bandwidth supply that was swamping

market demand and driving bandwidth prices down,                 stock prices

dropped and they suffered losses.                  Plaintiffs contend that these

losses were caused by defendants' material misstatements



                                      -   39   -
regarding the demand for and supply of undersea bandwidth.14

Hence, plaintiffs'’ economic loss was the decline in the value of

their stock that was the result of TyCom's misrepresentation of

the market for bandwidth.    What was initially concealed from

TyCom investors,   and what ultimately resulted in plaintiffs'

losses, was the knowledge that, at the time of the Offering,      the

demand for bandwidth would not, and in fact could not, keep pace

with the supply, which was increasingly flooding the market with

capacity.   When this information was disclosed,   the price of

TyCom stock,   like the prices of other telecommunications stock,

declined.   In this case, the entire market for telecommunications


      14 The Complaint's remaining allegations, those that mirror
the claims asserted by the plaintiffs in Tyco II, include claims
that the Prospectus was materially false and misleading because
it failed to disclose:   (1) that Tyco's executives were engaged
in systematic looting of the company; (2) that Tyco's executives
were financially motivated to use the proceeds of the Offering to
satisfy unauthorized loans; (3) that Tyco's reported success was
the result of systematic accounting fraud; (4) pervasive
analysts' conflicts; and (5) that defendants failed to notify
investors of James Brennan's participation in the TyCom offering
and his criminal record.   Plaintiffs have not pleaded any facts
that during the class period these alleged misrepresentations or
omissions were disclosed to the market and that there was a
resultant drop in the value TyCom stock following the disclosure.
Hence, plaintiffs have not sufficiently alleged that their losses
were caused by these purportedly fraudulent statements and
omissions, and therefore cannot be the basis for plaintiffs' §
10(b) claim here.

                                -   40   -
stock reacted negatively to the revelation.          Consequently,

plaintiffs' showing that their loss was fairly attributable to

the public airing of the true state of the bandwidth market,

which had been falsely misrepresented to them by defendants,

provides the causal link required by Dura.15

     I therefore conclude that these allegations,          if assumed to

be true, are sufficient at this stage of the proceedings

establish that the drop in TyCom's stock price was causally

related to defendants' misrepresentation both with respect to the

projected market demand for bandwidth and the significant excess

of bandwidth supply.   Dura Pharms., 125 S. C t . at 1634.        Even if,

as defendants maintain,   there had been an intervening event that

interrupted the chain of causation,          such a determination is a

matter of proof after discovery,     either at summary judgment or at



     15 This case is distinguishable from Lentell. In Lentell,
the Second Circuit explained that "when the plaintiff's loss
coincides with a marketwide phenomenon causing comparable losses
to other investors, . . . a plaintiff's claim fails when it has
not adequately pleaded facts which, if proven, would show that
its loss was caused by the alleged misstatements as opposed to
intervening events."  396 F.3d at 174 (internal quotations
omitted). Here, the collapse of the market for
telecommunications stock was arguably not an intervening event,
but rather the proximate result of defendants' misrepresentation
of the demand for and supply of bandwidth capacity.

                                -   41   -
trial,    and is not to be decided here on a Rule 12(b)(6) motion to

dismiss.    Lentell, 396 F.3d at 174.         Accordingly,   the Tyco

Defendants' motion to dismiss for failure to plead loss causation

is denied.16

     2.           The Underwriter Defendants

             a.   Analyst Conflicts

     In addition to joining the Tyco Defendants in their

arguments in favor of dismissal of the § 10(b) claim, the

Underwriters add that plaintiffs' claim that the Prospectus

failed to disclose analyst conflicts must be dismissed.             The crux

of this allegation is that defendants had a duty to disclose in

the Prospectus that there was a conflict of interest between the

Underwriters' investment banking and research departments.              See



     16 Plaintiffs also charge that the individual defendants,
Kozlowski, Swartz, and Garvey, violated § 20(a) of the Exchange
Act.   Section 20(a) imposes derivative liability on defendants
who "control" primary violators of securities laws.   See 15
U.S.C. § 78t(a).   A necessary element of a control person claim
under § 20(a) is a primary violation of the securities laws.
See, e.g.. Greebel, 194 F.3d at 207; Suna v. Bailey Corp.. 

 (1st Cir. 1997).   The Tyco Defendants have not
challenged the sufficiency of the § 20(a) claim except to the
extent that this claim depends on the existence of an underlying
violation of § 10(b).   Hence, because the Tyco Defendants' motion
to dismiss the § 10(b) claim is denied, the § 20(a) claim remains
viable.

                                 -   42   -
Compl.    164-94.

     In response,   the Underwriters argue that plaintiffs have

failed to plead a single fact showing that conflicts existed

concerning TyCom.17   Although plaintiffs devote nearly thirty

paragraphs in the Complaint to allegations that conflicts of

interest between the investment banking and research divisions of

Goldman Sachs and SSB resulted in the publication of biased

research reports on companies in the telecommunications industry,

they offer no facts connecting these alleged conflicts to TyCom.

In fact, as the Underwriters argue, plaintiffs' only allegations

related to TyCom are the general assertions that Goldman Sachs

and SSB were the underwriters of the TyCom Offering and that



     17 The Tyco Defendants also argue that there was no
obligation on the part of TyCom or Tyco to disclose analyst
conflicts in the Prospectus, and that any duty to disclose a
conflict resides with the analyst or underwriter.  See, e.g..
Foqarazzo v. Lehman Bros.. Inc.. 

, _ (S.D.N.Y.
2004).   I agree. Item 508(1)(1) of Regulation S-K (

(1)(1)), cited by plaintiffs require that underwriters of
securities disclose "any transaction that the underwriter intends
to conduct during the offering that stabilizes, maintains, or
otherwise affects the market price of the offered securities."
Similarly, Regulation M, Item 101 (

(a)) makes
it "unlawful" for an underwriter of a security to "attempt to
induce any person to bid for or purchase" a covered security
during the applicable restricted period.  These regulations
impose no duty to disclose on issuers.

                                -   43   -
their analysts later issued positive research reports on TyCom.

Such conclusory allegations are insufficient under the PSLRA and

Rule 9(b).      See Podanv v. Robertson Stephens.          Inc.. 318 F . Supp.

2d 146,   156   (S.D.N.Y. 2004);   In re Merrill Lynch & Co. Research

Reports Sec. Litig.. 

              (S.D.N.Y.

2003)("Merrill II")(dismissing claim that mutual fund purchased

securities to obtain investment banking business where plaintiffs

alleged only that defendants performed investment banking

services for, and issued analyst reports on, companies whose

securities were held by the fund).               Moreover, virtually all of

plaintiffs'’ allegations that there were conflicts at Goldman

Sachs and SSB are based on documents or communications that post­

date the TyCom Offering.      They therefore cannot support a claim

that the Prospectus for the Offering was false and misleading.

See, e.g.. Compl. 5 173     (e-mails from "August 2000"); i d . 5 179

(communications in "December 2000," "early 2001," and "February

2001”); 

 5 187     (e-mail from "June 2001").

     Finally, plaintiffs'’ attempt to rely on Rule 508(1) (1) of

Regulation S-K and Rule 101 of Regulation M is unavailing.                Rule

508(1)(1) requires that the Prospectus disclose any transaction



                                    -   44   -
that the underwriter intends to conduct during the offering that

stabilizes, maintains,   or otherwise affects the market price of

the offered securities."    

(1)(1).      (Emphasis

added).    Likewise, Rule 101 prohibits an "attempt to induce" the

purchase of "a covered security"      (i.e., the security being

offered,   see 

(b)).       

(a).

Plaintiffs'’ strained attempt to characterize research published

on other companies in the telecommunications industry as a

"transaction" intended to affect the market price of TyCom or an

"attempt to induce" the purchase of TyCom stock is unpersuasive.

See In re Salomon Analyst Level 3 Litig.. 

,

493 n.13   (S.D.N.Y. 2004)("Level 3" ) ("The Level 3 Complaint also

alleges that SSB's policies induced Grubman to issue ■'inflated

recommendations'’ on other companies besides Level 3. . . .        As

with the conflicts allegations generally . . . they cannot

satisfy the particularity requirements of Rule 9 (b) and the PSLRA

for fraud or false statement of opinion as to the Level 3

reports."); Podanv. 318 F. Supp. 2d at 157-58.

     I therefore conclude that plaintiffs'’ allegations regarding

the Underwriters' duty to disclose analyst conflicts are



                                 -   45   -
insufficient to satisfy the pleading requirements of a § 10(b)

claim.

          b.   Statements Contained In Analyst Reports18

     The Underwriters next argue that the § 10(b) claim against

Goldman Sachs and SSB must fail because plaintiffs have failed to

plead a false statement in the TyCom analyst reports and have

also failed to plead with particularity facts creating a strong

inference of scienter or loss causation.

     Plaintiffs'’ § 10(b) theory against Goldman Sachs and SSB is

based on allegations that their analysts, Governali and Grubman,

issued materially false and misleading reports concerning TyCom

after the Offering,   and on other companies prior to the Offering,

in an attempt to inflate the value of companies in the


     18 The Complaint points to three research reports authored
by Goldman Sachs analyst Governali: (1) an August 21, 2000 report
in which Governali included TyCom on a "recommend list," with a
12-month price target of $60 per share, Compl. 5 199; (2) an
October 18, 2000 report reiterating the "recommend list" rating
and the $60 price target, i d . 5 207; and (3) an April 26, 2001
report reiterating the "recommend list" rating, but reducing the
price target to $40 per share.    I d . 5 250.
        The Complaint also identifies three reports authored by
SSB analyst Grubman: (1) an August 21, 2000 report rating TyCom
as a "Speculative Buy" and setting a 12-18 month price target of
$75 per share, Compl. 5 200; (2) a July 18, 2001 report
reiterating the "buy" rating, i d . 5 190; and (3) an August 8,
2001 report downgrading Tycom to "neutral."    I d . 5 254.

                                -   46   -
telecommunications market.   In their opposition to the

Underwriters' motion to dismiss, plaintiffs add that the

analysts' biased research reports on securities in TyCom's

industry "had the effect of inflating the public's perception of

the value of . . . the securities of issuers,      such as TyCom, that

competed in the same market."       Pis.' Opp. To Underwriters' Mot.

to Dismiss at 20-21.   At the heart of this theory is the claim

that the Governali and Grubman were motivated to falsify their

research reports and ratings to make them appear more favorable

than their honestly-held opinions about the companies and their

stocks.   See Level 3 . 

.




                                -   47   -
     The Underwriters first argue that plaintiffs have failed to

plead a false statement in the TyCom analyst reports as required

by Rule 9 (b) and the PSLRA.   The Underwriters also argue that

plaintiffs cannot base a claim on analyst reports concerning

other issuers and other securities.          I agree with both arguments.

     Liability under § 10(b) can be predicated on statements of

opinion where "it can be shown not merely that a proffered

opinion was incorrect or doubtful, but that the speaker

deliberately misrepresented his actual opinions."          Level 3 . 

   (internal citations omitted).        To survive a

motion to dismiss on a false statement of opinion claim, however,

"a plaintiff must allege with particularity ■'provable facts' to

demonstrate that the statement of opinion is both objectively and

subjectively false."19   I d .; see Virginia Bankshares.     Inc. v.

Sandberg. 

   (1991).     Hence, the fatal flaw

in plaintiffs' allegations that Governali and Grubman issued

false and misleading reports with respect to other

telecommunications companies prior to the TyCom Offering,         and



     19 Plaintiffs do not dispute that the ratings and other
statements in the analyst reports are recommendations, or, in
essence, expressions of the analysts' opinions.

                                -   48   -
with respect to TyCom after the Offering,         is that plaintiffs have

failed to plead facts showing that either Governali or Grubman

did not believe the recommendations and other statements in the

reports at the time they were made.20          See also In re Credit

Suisse First Boston Corp.     (Agilent Techs..     Inc.) Analyst Reports

Sec. Litig.. 

,    at *6 (D. Mass. Mar. 31,

2 0 0 5 ) ("Agilent Techs.")(applying Virginia Bankshares and noting

that what was missing were "specific allegations of ■'provable

facts' that would support the twin inferences required:          (1) that

the analysts did not believe that Agilent merited a 'Buy' rating

and (2) that the 'Buy' rating was objectively unsupportable").

     With respect to Governali, plaintiffs allege that his

reports did not reflect his true opinion,         and were thus false and

misleading, because he had "private misgivings about the

telecommunications market" and because he "knew that there was no

demand for the   [TGN]" by virtue of his "access to senior TyCom

management   . . . and   [his] relationship with other large




     20 Indeed, it is not enough to allege only "that an opinion
was unreasonable, irrational, excessively optimistic, not borne
out by subsequent events, or any other characterization that
relies on hindsight." Level 3 , 

.

                                  -   49   -
bandwidth companies."     Compl.        199, 204.   In support of these

allegations, plaintiffs point to a March 2000 e-mail in which

Governali purportedly questioned Global Crossing's earnings

guidance and to his August 2000 statement that he was considering

a downgrade of a number of Competitive Local Exchange Carriers

("CLECs").   Id.      170-71,   173.    Unfortunately for plaintiffs,

these allegations offer no insight as to what Governali believed

about TyCom at the time he published his three reports,         and are

therefore inadequate to satisfy the pleading requirements of Rule

9(b) and the PSLRA.     See Level 3 . 

; Podanv.

318 F. Supp. 2d at 153-54;      In re Merrill Lynch & Co. Research

Reports Sec. Litig.. 

         (S.D.N.Y. 2003),

aff'd, 

    (2d Cir. 2005)("Merrill I")(noting that "e-

mails concerning securities other than 24/7 and Interliant fail

to meet the Rule 9(b)(let alone the PSLRA) pleading requirements

necessary to allege that Merrill Lynch made fraudulent statements

in reports concerning 24/7 or Interliant").         Likewise,

plaintiffs' attempt to impute to Governali knowledge that there

was no demand for the TGN on the basis of his "access to Tycom

management" is inadequate to establish that he did not believe



                                   -   50   -
his reports on TyCom when he issued them.    See Maldonado, 

.

       Plaintiffs' attempt to plead that Grubman's three reports

did not reflect his honest opinion regarding TyCom suffers from

similar defects and is therefore equally inadequate.    Here,

plaintiffs seek to support their charge that Grubman did not

believe his TyCom reports by citing two e-mails authored by other

SSB employees.    This pleading approach is insufficient.     Level 3 .

   (noting that reliance on "mischaracteri-

zations of e-mails written by other SSB employees" is "plainly

insufficient" to plead falsity of analyst report).

       First, plaintiffs cite an e-mail from an SSB investment

banker,   stating that "TyCom gives the appearance of being

conservative with respect to multiples relative to the comps

despite a very aggressive mode" to support their charge that

Grubman concealed his use of aggressive assumptions.    Compl. 5

203.    Yet, the e-mail refers only to TyCom's assumptions, not

Grubman's .   Plaintiffs have not pleaded any facts concerning

Grubman's assumptions,   aggressive or otherwise, nor have they

explained how the use of aggressive assumptions could be



                                -   51   -
misleading if the report disclosed the assumption on which it was

based.

     Plaintiffs also rely on a February 28, 2001 e-mail in which

another SSB employee allegedly noted that in addition to the

securities of several other issuers,             "[I]   [a]Iso don't like TyCom

or 360   (Tsix)."   Compl. 5 255.       Again, plaintiffs' reliance is

misplaced.    This e-mail reveals nothing about what Grubman

believed with respect to his TyCom recommendations and there is

no indication that Grubman authorized,             approved,   agreed with, or

even was aware of this communication.              See Nolte v. Capital One

F i n . Corp., 

, 315-16      (4th Cir. 2004).        These e-mails

thus cannot support plaintiffs' claim.

     Plaintiffs also rely on the bald assertion that the

analysts' positive buy ratings on TyCom common stock were the

undisclosed quid pro quo for the underwriting retention, but fail

to offer a single fact in support of this claim.               Moreover,   the

remainder of plaintiffs' allegations are derived from regulatory

investigations concerning telecommunications companies other than

TyCom.

     In fact, plaintiffs have not pointed to a single



                                    -   52   -
contemporaneous fact to support their contention that the

analysts'’ reports were not reflective of their authors' true

opinions.     Rather, plaintiffs rely on general allegations that

Governali and Grubman had "private misgivings" about the

telecommunications industry,       as well as e-mails written by other

SSB employees that purport to represent Grubman's true opinion

about TyCom.     These allegations are insufficient under Rule 9 (b)

and the PSLRA.

     Finally,    to adequately plead a § 10(b) claim, a plaintiff

must state with particularity facts sufficient to raise a

"strong" inference of scienter.          15 U.S.C. § 78u-4(b)(2); Greebel

v. FTP Software.    Inc.. 

   (1st Cir. 1999).

Although in the typical case,       falsity and scienter are different

elements, under a false-statement-of-opinion theory,               the two

requirements are essentially identical.                Level 3 . 

.     Consequently, where,    as here,       "the facts alleged are

insufficient to support an inference of subjective disbelief in

the opinions expressed,    they are likewise insufficient to support

any inference of scienter,    let alone a strong one."             Agilent

Techs., 

,    at *8.       Plaintiffs' § 10(b) claim



                                    -   53   -
premised on false analyst reports is thus dismissed.21

B.   Section 11

     Section 11 of the Securities Act "imposes liability on

signers of a registration statement and on underwriters,          among

others,   if the registration statement ■'contained an untrue

statement of a material fact or omitted to state a material fact

required to be stated therein or necessary to make the statements

therein not misleading.''"    Classman. 

    (quoting 15

U.S.C. § 77k(a)).     Typically,    fraud is not an element of a claim

under § 11, and a plaintiff asserting such a claim "may avoid

altogether any allegations of scienter or reliance."        Shaw. 

.     Consequently,    claims asserted under § 11 need only

satisfy the pleading standards of Rule 8(a), requiring "a short

and plain statement of the claim showing that the pleader is

entitled to relief."     Fed. R. Civ. P. 8(a).     If, however,    a

complaint attempts to establish violations of § 11 and § 10(b)

through allegations of a unified course of fraudulent conduct,


     21 As I noted above, the Underwriters also challenge the §
10(b) claim premised on false analyst report on the alternative
ground that plaintiffs'’ have failed to plead loss causation as to
these reports.  I need not address this argument, however,
because I conclude that plaintiffs have failed to establish that
the statements in the report were false when they were made.

                                    -   54   -
the complaint is said to "sound in fraud," and the more rigorous

pleading requirements of Rule 9(b) will apply to the § 11 and §

10(b) claims alike.    See i d .; Giarraputo, 

,        at *9.

     In this case, plaintiffs urge that their § 11 claims do not

"sound in fraud," and therefore should not be subjected to the

pleading requirements of Rule 9 (b).          The Underwriters counter

that with respect to plaintiffs' claims based on demand for

bandwidth and failure to disclose analyst conflicts and false

statements in analyst reports,       fraud is at the very heart of the

allegations.   I find the Underwriters' argument on this point

persuasive.

     Despite plaintiffs' boilerplate disclaimer excluding those

allegations that sound in fraud from their § 11 claim, they

cannot avoid the strictures of Rule 9 (b) where their core

allegations allege a fraudulent scheme.          Here, the specific

factual allegations on which Count I is based aver that

defendants "deliberately misrepresented TyCom's projections of

market demand in the   [PJrospectus in order to defraud investors,"

Compl. 5 142, and that the Underwriters "specifically directed

Andrew Kowalik to falsify his projections."           I d . 5 204.



                                 -   55   -
Likewise, predictive statements and projections are actionable

only if the speaker did not believe the statements when they were

made.        See Boston Tech., 

 (noting that

"optimistic predictions          ''that prove to be off the mark'— even the

most specific ones— are not actionable                . . . unless there was

intentional deception on the part of the defendant").                  I

therefore conclude that, at least as to these allegations,                 fraud

plainly lies at the core of the claim.                 See Havduk v. Lanna. 775

F .2d 441,      443   (1st Cir. 1985).

        Moreover,      as to the allegations concerning analyst conflicts

and false statements in analyst reports, plaintiffs must

establish that the analysts knowingly misrepresented their actual

opinions when they issued the reports.                 See Level 3 . 

       (explaining that " [a]dequately alleging the falsity of

a statement       [of opinion]    ...        is the same as adequately alleging

scienter.").          Accordingly, plaintiffs'’ § 11 claims concerning

demand for bandwidth,         analyst conflicts,        and false reports must

satisfy Rule 9 (b).

        1.      Tyco Defendants

        The Tyco Defendants challenge the sufficiency of plaintiffs'’



                                         -   56   -
§ 11 claim based on statements in the Prospectus concerning the

demand for bandwidth.   As I explained in Part III.A.I.a. above,

plaintiffs'’ allegations concerning bandwidth demand and improper

swap transactions are sufficient to satisfy the strict and

rigorous pleading requirements of Rule 9 (b) and the PSLRA.            It

therefore follows that these allegations also satisfy the

requirements of Rule 9(b) in the context of a § 11 claim.             I thus

decline to dismiss plaintiffs'’ § 11 claim premised on demand for

bandwidth.22

     2.   Underwriter Defendants

     As I explained in Part III. A. 2. above, plaintiffs'’

allegations concerning the failure to disclose analyst conflicts

and false statements in analyst reports are insufficient under

Rule 9(b) in the § 10(b) context.           Accordingly,   they are also


     22 Plaintiffs also charge Kozlowski, Swartz, and Garvey
with violation of § 15 of the Securities Act.    Like § 20(a) of
the Exchange Act, § 15 imposes derivative liability on defendants
who "control" primary violators of securities laws.    See 15
U.S.C. § 77o.Hence,    a necessary element of a control-person
claim under §   15is a primary violation of the securities laws.
See, e.g.. Greebel. 

; Suna v. Bailey Corp.. 

 (1st Cir. 1997).   The Tyco Defendants challenge the §
15 claim only   tothe extent that it depends on the existence of
an underlying violation of § 11.    Thus, because the Tyco
Defendants' motion to dismiss the § 11 claim is denied, the § 15
claim remains viable.

                               -   57   -
insufficient to satisfy Rule 9(b)'s requirements as to

plaintiffs' § 11 claim.     Moreover,          even under the much less

demanding requirements of Rule 8(a), plaintiffs' vague and

conclusory allegations concerning analyst conflicts and false

statements in the reports would be insufficient to support their

§ 11 claim.

C.   Statute of Limitations

     As an alternative ground for dismissal of the claims based

on demand for bandwidth, defendants argue that these claims are

time-barred.   Claims brought under § 11 and § 15 of the

Securities Act must be brought "within one year after discovery

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

should have been made through 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; see

Dodds v. Cigna Sec..     Inc.. 

         (2d Cir. 1993); In re

Tyco Int'l, Ltd..     Sec. Litiq., 

   (D.N.H.

2002).   Similarly,   claims brought under § 10(b) and § 20(a) of

the Exchange Act prior to July 30, 2002 had to have been

commenced within "one year after the discovery of the facts



                                  -   58   -
constituting the violation and within three years after such

violation."23   Lampf, Pleva, Lipkind, Prupis & Petigrow v.

Gilbertson. 

   (1991) (§10(b) claims); Dodds.         

   (§ 20(a)   claims).

     A two-part test     is used in the First        Circuit to determine

when a plaintiff has     sufficient notice         of a securities fraud

claim to trigger the one-year limitations period.              Young v.

Depone. 

 (1st Cir. 2002).              First, the party invoking

the statute of limitations defense "must demonstrate that

sufficient ■'storm warnings'’24 of fraud were on the horizon to

trigger a duty to inquire further."              Tyco II. 

,      at


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

 Stat. 745 (2002), § 10(b)
claims commenced after July 30, 2002 are subject to a two-year
statute of limitations.  The Tyco Defendants argue that SOX's
two-year limitation period does not apply retroactively to revive
already time-barred claims such as the § 10(b) claim here.   See
Foss v. Bear. Stearns & Co.. 

 (7th Cir. 2005);
In re Enter. Mortgage Acceptance Co.. Sec. Litiq.. 

 (2d Cir. 2004).  Because I conclude that plaintiffs'’ § 10(b)
claim based on the demand for bandwidth was timely under the preSOX one-year statute of limitations, I need not determine if the
SOX two-year limitations period applies to this case.

     24 "Storm warnings" exist "[w]hen telltale warning signs
augur that fraud is afoot," such that if the warning signs are
"sufficiently portentous," they may, "as a matter of law be
deemed to alert a reasonable investor to the possibility of
fraudulent conduct." Young, 

.

                                    -   59   -
*18   (citing Young, 

).             If the defendant meets this

burden,    the plaintiff must then produce evidence establishing

that even a reasonably diligent investigation would not earlier

have produced sufficient evidence to permit the filing of a

legally viable complaint.     

       Because "[t]he multifaceted

question of whether storm warnings were apparent involves issues

of fact," and the "circumstances of each case must be explored

independently," in certain cases it may not be appropriate to

resolve this issue on a motion to dismiss."               I d . (also noting

that "[i]n the archetypical case . . .              it is for the factfinder

to determine whether a particular collection of data was

sufficiently aposematic to place an investor on inquiry notice").

      The original complaint in this action was filed on July 24,

2003 .25   Defendants argue that the original complaint is untimely

because it was filed more than one year after plaintiffs could

have discovered the fact giving rise to their claims related to

the demand for bandwidth.     Plaintiffs dispute defendants'

assertion that a March 1, 2001 article in America's Network, an


     25 A second, similar complaint was filed in a separate
action on September 23, 2003.  After the two related cases were
consolidated, the consolidated Complaint was filed on December
13, 2004.

                                    -   60   -
April 12, 2001 article in Business Wire, and an April 17, 2001

Tyco press release put investors on notice that statements in the

July 26, 2000 Prospectus may have been false such that they could

have filed a viable claim within one year.

     Plaintiffs urge that these articles, which did not mention

TyCom by name, merely notified TyCom investors that the market

for undersea bandwidth was not then as robust as defendants had

projected,   and thus could not have alerted investors to the fact

that statements in the Prospectus were false at the time they

were made.    Such generalized statements, plaintiffs argue, were

insufficient to have put them on inquiry notice.    See In re

DaimlerChrvsler AG Sec. Litiq.. 

    (D. Del.

2003)(rejecting notice inquiry where the articles cited by

defendants did not discuss "lawsuits that had been previously

filed, official investigations that were being conducted,    or

allegations and incontrovertible objective evidence of fraud");

Thompson v. Metro. Life Ins. Co.. 

(S.D.N.Y. 2001)(two dozen articles reflecting "general public

awareness" of industry wrongdoing insufficient to put plaintiffs

on inquiry notice).



                                -   61   -
     Plaintiffs further argue that it was not until September

2002, when Tyco issued a press release detailing Kozlowski and

Swartz's misconduct and announcing that it had filed suit against

them, that they had reason to suspect that the statements in the

Prospectus were false at the time they were issued.            According to

plaintiffs,   this was the first "storm cloud" to cast a pall over

the statements in the Prospectus.            Following this disclosure,

plaintiffs assert that they timely launched an investigation into

statements contained in the TyCom Prospectus and filed their

initial complaint on July 24, 2003, well within one year of the

storm warnings.    If plaintiffs are correct,         and at this juncture

I must accept as true their well-pleaded facts,           I agree that

their claims are not barred by the one-year statute of

limitations.



                           IV. CONCLUSION

     For the reasons set forth above, the motions to dismiss as

to Tyco, TyCom, Garvey, Kozlowski,           and Swartz are denied   (Doc.

Nos. 384 & 391).    The Underwriters' motion to dismiss         (Doc. No.

392) is granted.



                                -   62   -
     SO ORDERED.

                                     /s/Paul Barbadoro____________
                                     Paul Barbadoro
                                     United States District Judge
September 2, 2005

cc: Counsel of Record




                        -   63   -