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A federal judge on Monday awarded $24.3 million in attorney’s fees — 30 percent of an $82.5 million settlement — to the team of plaintiffs’ lawyers in the class-action shareholder’s suit against Aetna Inc. In his 28-page opinion in In Re: Aetna Inc. Securities Litigation, U.S. District Judge John R. Padova picked up on a recent trend to be just as generous with the plaintiffs’ lawyers even when the settlement figures are extra large. “This court sees no principled basis for reducing the requested award by some arbitrary amount,” Padova wrote. Some courts have said that as settlements grow larger, the percentage awarded to the attorneys should shrink. But Padova agreed with Senior U.S. District Judge Marvin Katz’s analysis in In Re: IKON Securities that such a practice punishes lawyers for getting a better result. Padova also found that the lawyers had earned the money — logging more than 22,000 hours in a hard-fought case that was at one point dismissed on summary judgment. At their usual rates of $300 per hour, Padova found that the plaintiffs’ team would have been paid more than $6.6 million in fees. By awarding 30 percent of the fund after $1.5 million in costs was subtracted, Padova said, the fee reflects a “multiplier” of about 3.6 — within the range that courts routinely award in common-fund cases. “Given the substantial risk of establishing liability and damages in this case, the large amounts of time and money expended, the outstanding quality of counsel, and the adequacy of the settlement reached, a multiplier of 3.6 is reasonable,” Padova wrote. Sharing in the award are: attorneys Stuart H. Savett, Robert P. Frutkin and Katharine M. Ryan of Philadelphia’s Savett Frutkin Podell & Ryan; Bernard M. Gross, Deborah R. Gross and Christopher Reyna of the Law Offices of Bernard M. Gross, also of Philadelphia; 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’s Duane Morris & Heckscher, along with Lewis B. Kaden and Michael P. Carroll of New York-based Davis Polk & Wardwell. In the opinion, Padova also gave his final approval to the settlement that was reached in September. The suit arose from Aetna’s merger with HMO giant U.S. Healthcare in July 1996. At the time of the merger, Aetna allegedly stated publicly that its new acquisition would generate an annual increase of $300 million in operating income per year, a major portion of which would come from reduced HMO medical expenses. Shareholders said Aetna forecasted that the increased revenues would be achieved within 18 months of the merger, when, in fact, Aetna executives knew as early as October 1996 that USHC’s medical expense reserves were understated by $76 million. The suit accused Aetna of engaging in accounting and actuarial manipulations to artificially lower the company’s reported medical expense reserve in violation of Generally Accepted Accounting Principles, allegedly to conceal the shortfall and to create a false impression that medical costs were flat and in accordance with expectations. To meet analysts’ earnings expectations and further conceal the medical expense reserves shortfall, the suit said, Aetna reclassified certain reserves as unnecessary and released $69 million of such reserves into operating earnings in the first two quarters of 1997 — a move that allegedly inflated Aetna’s reported earnings. Shareholders said Aetna’s quarterly earnings announcements and other public statements included materially false claims that the integration of USHC and Aetna was rapid and successful and that medical costs were flat and under control. In truth, the suit alleged, Aetna was encountering significant problems in integrating USHC’s medical claims processing operations with Aetna’s. As a result, the suit said, investors were misled into believing that the USHC merger and operations integration were proceeding successfully, and that Aetna was meeting all the expectations that it had represented to the market. Aetna concealed the integration problems and inflated its reported earnings until September 1997, the suit said, when it announced that its third quarter earnings would be below analysts’ consensus estimates and that it would increase its medical claims reserves because of the problems arising from the merger. The news caused Aetna stock to plummet 10 percent, from $90.50 per share to $81. BOTH SIDES AVOID RISKS Padova found that the settlement was “fair and reasonable” partly because both sides were avoiding significant risks. The case was about to go before a jury with a trial that could have lasted for months, Padova said, and the experts hired by each side had offered wildly different estimates of the aggregate loss suffered by the plaintiffs. Padova said the plaintiffs had claimed “enormous” monetary damages of $830 million, while the defense strongly contested liability, but nonetheless insisted that damages, if any, were no more than $117 million. “In light of the wide disparity in damage assessments, plaintiffs risked the rejection of their expert damages witness by the jury, while defendants risked entry of a massive damage award against them. The settlement avoids this uncertainty for both sides,” Padova wrote. Although the plaintiffs settled for just 10 percent of their maximum estimate of damages, Padova also noted that the fund is worth about 70 percent of the defense estimate. Padova also found that the settlement has none of the “hallmarks of a questionable settlement” that have led appellate courts to reject several high-profile, large class-action settlements in recent years. The Aetna shareholders, he noted, will receive a significant monetary settlement, and “there is no suggestion of collusion between defendants and plaintiffs’ counsel. To the contrary, this litigation has been aggressively pressed by both sides for nearly three years.” Padova applied all the factors that courts consider in weighing settlements and found that none weighed against it. “The complex nature of the evidence combined with the lengthy duration of the litigation weighs strongly in favor of settlement,” he wrote. Notably, he said, no class members objected to the settlement of the fees. The plaintiffs also might have lost if the case had gone to trial, he noted. “Plaintiffs would have faced significant hurdles in proving the speculative value of the stock had there been no fraud given defendants’ aggressive contest to plaintiffs’ damage estimates. On summary judgment, defendants set forth the theory that Aetna’s stock price unforeseeably declined due to a general industry downturn,” Padova wrote.

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