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With settlements totaling more than $334 million and attorney fees of about $83 million, the class action shareholders’ suit filed in the wake of an accounting scandal at Rite Aid Corp. now ranks among the nation’s five largest shareholder settlements ever. In an opinion handed down this week, U.S. District Judge Stewart Dalzell of the Eastern District of Pennsylvania granted final approval of settlements worth more than $126 million by the final three defendants. The accounting firm KPMG paid $125 million; former Rite Aid CEO Martin Grass paid $1.4 million; and former Rite Aid Chief Operating Officer Timothy Noonan paid more than $150,000. All three of the settling defendants also agreed to drop their challenges to a prior settlement by Rite Aid Corp. Dalzell’s 15-page opinion also shows that the corporation’s settlement is now worth $207 million and no longer includes any stock components. Originally, Dalzell had approved a settlement worth $193 million that included a combination of cash and stock. At first, the settlement was structured so that Rite Aid would pay $43.5 million in cash — nearly all of its available insurance — as well as at least 20 million shares of Rite Aid common stock promised to be worth at least $149.5 million and possibly more if the stock performed well in the immediate future. Dalzell applauded the plaintiffs’ team for converting the entire settlement to cash. As Dalzell explained in a footnote to this week’s opinion: “Thanks to nimble class counsel, this sum, which once included securities worth $149.5 million, is now all cash. Seizing on an opportunity Rite Aid presented, class counsel first renegotiated what had been stock consideration into Rite Aid Notes, and then this year monetized those notes.” Rite Aid redeemed the notes from the class in February for more than $145 million plus $14.4 million in interest, Dalzell noted. In a prior opinion, Dalzell awarded the plaintiffs’ lawyers 25 percent of the settlement fund as their fee. Now that all the settlements have won final approval, simple math shows that the plaintiffs’ lawyers will be receiving more than $83 million, with the lion’s share going to two firms — Berger & Montague in Philadelphia and Milberg Weiss Bershad Hynes & Lerach in New York. Court records show that 34 plaintiffs’ firms will share in the fees, but that more than 80 percent will go to the two lead firms who together logged more than 11,000 hours on the case. The Berger firm’s team was led by Sherrie R. Savett and included Carole R. Broderick and Robin Switzenbaum. The Milberg team was led by David J. Bershad and included William C. Fredericks, Brian C. Kerr, Susan M. Greenwood and Christian Siebott. Dalzell had strong words of praise for the plaintiffs’ team, saying they were “extraordinarily deft and efficient in handling this most complex matter.” When the suit was filed in 1999, Dalzell noted, the plaintiffs “were at least 18 months ahead of the United States Department of Justice in ferreting out the conduct that ultimately resulted in the write-down of over $1.6 billion in previously reported Rite Aid earnings.” The plaintiffs’ lawyers’ skills also led to a renegotiation of the corporate settlement to convert it all to cash, with more than $14 million in interest added, Dalzell noted. “This litigation presented layers of factual and legal complexity which assured that, absent a global settlement, these disputes would take on Dickensian dimensions. … In short, it would be hard to equal the skill class counsel demonstrated here,” Dalzell wrote. In the suit, investors alleged that between May 1997 and March 1999, Rite Aid portrayed itself as a company with “very strong” profitability and said it was in the midst of a major program to expand and modernize its operations. In fact, the suit alleged, the modernization and expansion programs were “encountering significant problems.” But instead of publicly disclosing the problems, the suit alleged that Rite Aid engaged in a variety of improper accounting methods designed to hide its true financial picture by both artificially inflating its earnings and deflating its expenses. Over a three-year period, the suit alleged, Rite Aid succeeded in artificially inflating its after-tax earnings by more than $1.6 billion. The suit also alleged that KPMG was “aware of” and “recklessly disregarded” Rite Aid’s improper accounting practices. In each of the three years, the suit said, KPMG issued “unqualified auditor’s opinions” that said Rite Aid’s financial statements conformed with generally accepted accounting principles. The public first learned of the problems in March 1999 when Rite Aid announced that its fourth-quarter earnings would be less than expected. The news caused stock prices to drop from $37 per share to $22.56. Soon after, investors learned that the SEC was investigating Rite Aid’s accounting practices. The company responded by restating its financial results for the previous three years. But the suit alleged that the true extent of Rite Aid’s problems wasn’t revealed until November 1999, when a series of disclosures rocked the company and caused its stock price to plummet to just $5.38 per share.

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