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Health insurance giant Aetna Inc. has agreed to pay $82.5 million to settle a shareholders’ lawsuit that said the company’s stock price plunged after a period in which it hid its problems with integrating the newly acquired subsidiary U.S. Healthcare. The settlement is the second largest in a securities case in the Eastern District of Pennsylvania, topped only by the $111 million settlement by IKON Office Solutions Inc. in November 1999. If the Aetna settlement is approved by U.S. District Judge John R. Padova, the plaintiffs’ lawyers could be awarded more than $27.2 million in attorney fees. The proposed settlement was filed just weeks before the case was set to go to trial on Nov. 10. Lead plaintiffs’ attorney Stuart H. Savett of Philadelphia’s Savett Frutkin Podell & Ryan said Tuesday that the parties exchanged “hundreds of thousands” of pages of documents and took 35 depositions. Aetna, in the settlement papers, said it believes it is not liable and has good defenses but chose to settle “solely to avoid further expense, inconvenience and burden of this protracted litigation, and the distraction and diversion of personnel and resources … and to avoid the risks inherent in uncertain, complex litigation.” In the suit, investors alleged that Aetna falsely represented that it was successfully integrating its operations with the operations of USHC following their merger and that Aetna issued false and misleading financial statements for the first and second quarters of 1997. Specifically, they alleged that after the merger of Aetna and USHC, there were numerous technical and logistical problems with the integration. Because the computer systems used by Aetna and USHC were incompatible, the suit said, the conversion of Aetna’s contracts and claims adjudication and reimbursement payment systems from its computer systems to USHC’s more advanced system was plagued with difficulties. In early 1997, the suit alleged, tens of thousand of electronically filed claims were lost in what Aetna employees called “a computerized black hole.” The integration of the Aetna and USHC computer systems was also severely complicated by the fact that in the spring of 1997, Aetna changed patient identification numbers and reimbursement codes without alerting or giving new numbers and codes to provider-billing personnel, the suit said. Consolidation of claims service centers and reduction of workforce also compounded the computer systems’ problems because Aetna had insufficient employees to handle the unpaid claims, the suit alleged. Aetna also experienced serious difficulties in negotiating pre-existing and new provider contracts on more favorable terms, the suit said. The suit alleged that after concealing its integration and financial problems, Aetna announced on Sept. 29, 1997, that its third-quarter earnings would be 25 percent below analysts’ estimates and that it would increase its medical claims reserves by $75 million to $105 million because of problems associated with the merger. According to the suit, the price of Aetna’s common stock fell that day as a result of Aetna’s announcement and closed down $9.50 per share at $81 per share. In discovery, the plaintiffs’ lawyers said they learned that Aetna had engaged in accounting manipulation to hide the fact that its medical claims payable reserves were understated. Savett was joined on the plaintiffs’ team by his partners, Robert P. Frutkin and Katharine M. Ryan; attorneys Bernard M. Gross, Deborah R. Gross and Christopher Reyna of the Philadelphia Law Offices of Bernard M. Gross; and Melvyn I. Weiss, Keith Fleischman, Salvatore J. Graziano and U. Seth Ottensoser of the New York firm Milberg Weiss Bershad Hynes & Lerach. Aetna was represented by Michael M. Baylson of Philadelphia-based Duane Morris & Heckscher along with Lewis B. Kaden and Michael P. Carroll of New York-based Davis Polk & Wardwell.

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