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A federal judge has awarded more than $32.4 million in fees to the team of plaintiffs’ lawyers who secured a $111 million settlement in the class-action securities fraud suit against IKON Office Solutions Inc. In a 73-page opinion, Senior U.S. District Judge Marvin Katz announced final approval of the settlement — the largest securities settlement ever in the Eastern District of Pennsylvania — as well as approval of a related $5 million settlement of a derivative suit. Katz found the settlement was “fair and reasonable” because while investors potentially could have won more than $1 billion if the case went to trial, they also risked getting nothing at all. And a much larger award could have sent IKON, a Malvern, Pa.-based provider of office equipment and services, into bankruptcy. But the big news was Katz’s decision not to trim the huge attorney fees award — if only for its sheer size. “The court is well aware that most decisions addressing similar settlement amounts have adopted some variant of a sliding fee scale, by which counsel is awarded ever diminishing percentages of ever increasing common funds,” Katz wrote. In In re Unisys Corp., Katz said, the court awarded just 6.25 percent of a $111 million fund. And in In re Chambers Dev., the court again applied a sliding scale to award 21.6 percent of a $95 million fund. “This court respectfully concludes that such an approach tends to penalize attorneys who recover large settlements. More importantly, it casts doubt on the whole process by which courts award fees by creating a separate, largely unarticulated set of rules for cases in which the recovery is particularly sizable,” Katz wrote. “It is difficult to discern any consistent principle in reducing large awards other than an inchoate feeling that it is simply inappropriate to award attorneys’ fees above some unspecified dollar amount, even if all of the other factors ordinarily considered relevant in determining the percentage would support a higher percentage,” he wrote. Such an approach, Katz said, also “fails to appreciate the immense risks undertaken by attorneys in prosecuting complex cases in which there is a great risk of no recovery.” Reducing the percentage awarded for larger settlements also fails to give sufficient weight to the fact that “large attorneys’ fees serve to motivate capable counsel to undertake these actions,” Katz wrote. In the final analysis, Katz found that the plaintiffs’ team on the IKON case deserved the full fee they had requested. “Class counsel did a remarkable job of representing the class interests. In so doing, they expended huge amounts of time and money, and faced considerable risks of non-recovery,” Katz wrote. “They also settled expeditiously with very few objectors. An award of 30 percent of the net settlement fund, which comes to approximately 28.4 percent of the gross settlement fund after deducting costs and considering that the derivative counsel fees and costs will come out of this award, is eminently reasonable and fair,” he wrote. Sharing in the award are four firms that served as co-lead counsel — Philadelphia’s Berger & Montague; Seattle’s Keller Rohrback; New York-based Milberg Weiss Bershad Hynes & Lerach; and Stull, Stull & Brody — as well as liaison counsel, Philadelphia’s Savett Frutkin Podell & Ryan. STOCK PRICES According to the suit, IKON’s former officers set out to inflate the company’s stock price so that they could go on an aggressive campaign of acquiring smaller companies, building an office-service empire that spread from the United States to Canada and Europe. Between 1995 and 1998, IKON purchased close to 200 independent companies, which it then attempted to integrate into its own network. But the company experienced a variety of problems in its growth, the suit alleged, especially with respect to its internal auditing procedures. And it kept the problems a secret so that it could keep its stock price high, the suit said, since most of its acquisitions involved using IKON stock as currency. After a “special review procedure” in the summer of 1998, IKON announced on Aug. 14, 1998, that it would be taking a $110 million charge to earnings — $94 million in the third fiscal quarter and $16 million against previously reported second fiscal quarter earnings. Stock prices dropped sharply on the news, and lawyers later said shareholders lost at least $1 billion when the stock reached its proper selling price. At first, the shareholders sued IKON and its former officers, all of whom were at the helm during the period that all of the alleged misleading statements were made. But just a few months after the suit was filed, the plaintiffs returned to court and asked permission to add Ernst & Young as defendants for violating Section 10(b) and Section 11 of the Securities Act. The amended suit alleged that the accountants, as both external and internal auditors, acted recklessly by issuing unqualified audit reports in October 1997 that vouched for the financial statements issued by IKON. The auditors said IKON’s statements conformed with generally accepted accounting principles and that E&Y’s audit itself complied with generally accepted auditing standards. The shareholders allege that E&Y auditors were aware that their audit was flawed because it made no mention of allegations they had heard that one of IKON’s officers was “cooking the books” and that the company lacked internal controls, had doubtful accounts and overstated its subsidiary income. The suit says E&Y was aware of the problems from a very early date but nonetheless continued to issue unqualified statements regarding IKON’s finances. In the audit opinions, dated Oct. 15 and 27, 1997, E&Y stated: “We have audited the accompanying consolidated balance sheets of IKON Office Solutions, Inc. … and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended Sept. 30, 1997. “… We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.” MOVE TO DISMISS E&Y’s lawyers, Edward M. Posner of Philadelphia’s Drinker Biddle & Reath and Marc Gary of Mayer Brown & Platt in Washington, moved to dismiss the claims, arguing that the shareholders failed to meet the requirements for pleading fraud with “particularity.” But in a 31-page opinion handed down in September 1999, Judge Katz refused to dismiss E&Y as a defendant, saying the plaintiffs had met the legal test for pleading “scienter,” or knowledge on the part of the auditors. E&Y argued that the plaintiffs could not show scienter merely by arguing that E&Y knew that Ikon’s chief financial officer, Kurt Dinkelacker, had been accused of doctoring accounts. Katz disagreed, saying the suit alleges that E&Y was informed at an auditing committee meeting that Dinkelacker was altering accounts and instructing others to do so. The suit also said E&Y was informed of Dinkelacker’s wrongful activities by at least April 1997 and that handwritten notes showed that auditors were told that “Kurt instructed everyone to cook the books.” Those claims, Katz said, if proven, would be sufficient to hold the auditors liable. In the settlement, IKON pledged to cooperate with the plaintiffs’ lawyers in their continuing litigation against E&Y. Berger & Montague attorneys Merrill G. Davidoff and Todd S. Collins will be lead trial counsel for the plaintiffs if the case goes to trial. In approving the settlement with IKON, Katz found that many of the factors courts consider weighed “heavily in favor” of approval. If the case didn’t settle, he said, the case would likely stretch on “for months or even years longer with significant financial expenditures by both defendants and plaintiffs.” The discovery in the case, he said, “proved to be particularly complex because of IKON’s decentralized structure.” Many of the businesses purchased by IKON had not been fully integrated, administratively or otherwise, into its system. And the extremely large sums of money at issue, he said, “almost guarantee that any outcome, whether by summary judgment or trial, would be appealed.” Very few objections were filed opposing the settlement, and some appeared only to seek a clarification. “No large institutional investor has objected to the proposed settlement, and there have been few opt-outs given the size of the class,” Katz wrote. IKON eventually produced more than 2 million pages of documents in discovery, Katz said, and the plaintiffs’ lawyers managed to organize the information while minimizing duplication by establishing a computerized document retrieval system and a system of reviewing documents by teams of attorneys. Plaintiffs’ counsel conducted more than 35 depositions of IKON personnel, Katz said, and did so “in an extremely short time.” As a result of such extensive discovery, Katz found that the plaintiffs’ team was highly prepared for the settlement negotiations. “This is not a situation in which plaintiffs’ counsel have conducted only cursory investigation or have otherwise failed to consider the ramifications of settlement,” Katz wrote. “The fact that counsel claim over 45,000 hours of time on this matter, which has been before this court for more than a year and a half, strongly suggests that they are well-informed on the merits of settlement versus continued litigation.”

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