THE ROSEN LAW FIRM, P.A.P.C. Laurence M. Rosen, Esq by plj11999

VIEWS: 25 PAGES: 31

									THE ROSEN LAW FIRM, P.A.P.C.
Laurence M. Rosen, Esq. (LR-5733)
232 Madison Avenue, Suite 906
New York, New York 10016
Tel: (212) 532-7299
Fax: (212) 202-3827

Counsel for Plaintiff



UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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BRIAN BARRY, on behalf of himself and all                           Index No.
others similarly situated,

                                   Plaintiff,                       CLASS ACTION
                                                                    COMPLAINT FOR
                                                                    VIOLATIONS OF THE
                         vs.                                        FEDERAL SECURITIES
                                                                    LAWS
AETNA, INC., WILLIAM H. DONALDSON, and
JOHN W. ROWE, M.D.,
                                                                    JURY TRIAL
                                    Defendants.                     DEMANDED
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        Plaintiff, by and through its attorneys, alleges the following upon personal

knowledge as to itself and its acts. All other allegation are based upon the investigation

of its counsel which has included, inter alia:

                 (i)      review and analysis of filings made by Aetna, Inc. (“Aetna” or the

“Company”) with the Securities and Exchange Commission (“SEC”), including

Amendment No. 2 to Form 10 General for Registration of Securities disseminated to

prospective shareholders on or about December 1, 2000 (the “December 1, 2000

Registration Statement”);




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               (ii)    review and analysis of securities analysts’ reports concerning

Aetna;

               (iii)   review and analysis of press releases, management conference call

transcripts and publications, including defendant Rowe’s statements at a Sanford C.

Bernstein Investor Conference in June 2001. Further facts relating to the securities

violations alleged herein are within the control of the defendants.


                               NATURE OF THE CASE

         1.    This is a securities class action on behalf of all persons who purchased on

the open market the common stock of defendant Aetna, Inc. between December 1, 2000

and April 9, 2001, inclusive (the "Class"). The claims asserted in the action arise under

Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5

promulgated thereunder by the SEC and Section 20(a) of the Exchange Act.

         2.    On July 20, 2000 Aetna announced it had reached a definitive agreement

to sell its financial services and international businesses to ING Group N.V. (“ING”) and,

in an integrated transaction, planned to spin-off its domestic healthcare and large case

pensions businesses in the form of New Aetna to its shareholders. This transaction was

approved by the shareholders at the November 30, 2000 shareholders meeting and closed

on December 13, 2000. The spin-off and merger occurred simultaneously with each

Aetna shareholder receiving approximately $35 in cash in the merger and one share of

New Aetna common stock in the spin-off for each share of Aetna common stock held on

the record date of December 13, 2000.

         3.    During the Class Period, as set forth in detail herein, defendants misled the

investing public by falsely representing, among other things, that the New Aetna was



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implementing a number of strategic and operational initiatives which addressed, among

other things, rising medical costs and improved the efficiency of the operations pursuant

to a comprehensive review of its healthcare business model. In truth and in fact, the

Company was experiencing escalating medical costs which it was not adequately

reserving due to: (a) significant problems in its overpayment of claims or paying single

claims multiple times; (b) inadequate pricing for risk enrollment; (c) adverse selection;

(d) provider reimbursement rates, contracting issues; and (e) increased short term

utilization.

        4.     On April 10, 2001, Aetna announced that its first quarter 2001 results were

expected to be significantly lower than anticipated as a result of increased medical costs

due to higher utilization of healthcare services in the fourth quarter 2000 and first quarter

of 2001 and an increase in medical expense reserves to be made in the first quarter of

approximately $90 million before taxes related to medical services performed in prior

periods, primarily the fourth quarter of 2000. As a result of this announcement, the price

of Aetna’s common stock plunged from $36.15 on April 9, 2001 to a low of $28.75 on

April 10, 2001, a decrease of over 20% on heavy trading volume.

                             JURISDICTION AND VENUE

        5.     The claims asserted herein arise under and pursuant to Sections 10 (b) and

20 (a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j

(b), 78t (a) and Rule 10 (b)(5) promulgated thereunder by the SEC, 17 C.F.R. § 240.

10 (b)(5).

        6.     This Court has jurisdiction over the subject matter of this action pursuant

to 28 U.S.C. §§ 1331 & 1337, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.




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        7.       Venue is proper in this District pursuant to Section 27 of the Exchange

Act and 28 U.S.C. § 1391 (b). Defendant New Aetna, the issuer, conducts business in

this District; and the acts complained of (including the trading of the stock based upon

misleading information, and the preparation, issuance and dissemination of the materially

false and misleading information to the investing public) occurred in substantial part in

this District.

        8.       In connection with the acts alleged in this Complaint, defendants, directly

or indirectly, used the mails and the means and instrumentalities of interstate commerce,

including telephonic communications.

                                      THE PARTIES

        9.       Plaintiff purchased Aetna common stock at artificially inflated prices

during the Class Period and has been damaged thereby, as set forth in the attached

certification.

        10.      Defendant Aetna is a Pennsylvania corporation with its corporate offices

in Hartford, Connecticut and headquarters in Blue Bell, Pennsylvania. Aetna is the

nation’s largest healthcare benefits company, with approximately 19.2 million health

members, 14.5 million dental members and 11.4 million group life and disability

insurance members as of September 30, 2000.

        11.      (a)    The individual defendants identified below served, at times

relevant to the claims set forth herein, as senior officers and directors of Aetna in the

positions set forth opposite their names (the "Individual Defendants"):

        Name                           Position

        William Donaldson              Chairman of the Board of Directors




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       John Rowe, M.D.                President, Chief Executive Officer and Director

               (b)    Because of the Individual Defendants' positions with the Company,

they had access to the adverse undisclosed information about its business, operations,

revenue recognition and reserve policies, operational trends, finances, markets and

present and future business prospects via access to internal corporate documents

(including the Company's operating plans, budgets and forecasts and reports of actual

operations compared thereto), conversations and discussions with other corporate officers

and employees, attendance at management and Board of Directors' meetings and

committees thereof and via reports and other information provided to them in connection

therewith.

       12.     The largest expenses of a managed healthcare company such as Aetna are

its medical expenses. Accordingly, a key component in determining Aetna's profitability

in a given period and for the future is the amount of its medical expenses.

       13.     Aetna’s medical expenses are the costs incurred by it as a result of

healthcare services provided to its insured members. The calculation of its medical

expenses include the following: Medical Claims Paid -- which consists of medical

expenses incurred and paid by Aetna during a particular accounting period; and Medical

Claims Payable -- which consists of: reported but not paid - medical expenses incurred

by Aetna during a particular accounting period that were reported to it by medical

services providers by the end of the accounting period, but were not paid by Aetna at the

end of the accounting period ("RBNP claims"); and incurred but not reported - medical

expenses incurred by Aetna during a particular accounting period that were not reported

to it by medical services providers by the end of the accounting period and were not paid




                                             5
by Aetna at the end of the accounting period ("IBNR claims"). Aetna's 1997 Annual

Report defines its reserves for the health risk business as medical claims payable which

reflect estimates of the ultimate costs of IBNR and RBNP claims. (RBNP and IBNR

claims are jointly referred herein as "Medical Claims Payable" or "Medical Claims

Reserves").

       14.     Because neither RBNP claims nor IBNR claims have been paid by the end

of the accounting period being reported, a significant amount of Aetna's medical

expenses are not paid by the end of any given accounting period. As a result, Aetna

accrues Medical Claims Reserves to account for unpaid medical expenses which it

classifies on its balance sheet as Medical Claims Payable.

       15.     As set forth more fully below, the myriad of ongoing undisclosed

problems, which were known to, or recklessly disregarded, by defendants caused the

Company to fail to account for a material amount of medical claims which were reported

to Aetna by medical services providers. As such, Aetna's ability to properly calculate

RBNP and IBNR claims was seriously impaired, thus materially impacting Aetna’s

operating earnings.

       16.     It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the materially false, misleading and incomplete information

conveyed in the Company's public filings, press releases and other publications as alleged

herein are the collective actions of the narrowly defined group of defendants identified

above. Each of the above officers and directors of Aetna, by virtue of his high-level

position with the Company, directly participated in the management of the Company, was

directly involved in the day-to-day operations of the Company at the highest levels and




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was privy to confidential proprietary information concerning the Company and its

business, operations, prospects, growth, finances, recognition and reserve policies and

financial condition, as alleged herein. Said defendants were involved in drafting,

producing, reviewing and/or disseminating the materially false and misleading statements

and information alleged herein, were aware, or recklessly disregarded, that the false and

misleading statements were being issued regarding the Company and approved or ratified

these statements, in violation of the federal securities laws.

       17.     As officers and directors and controlling persons of a publicly-held

company whose common stock was, and is, registered with the SEC pursuant to the

Exchange Act, traded on the NYSE, and governed by the provisions of the federal

securities laws, the Individual Defendants each had a duty to disseminate promptly

accurate, complete and truthful information with respect to the Company's financial

condition and performance, growth, operations, business, markets, management, earnings

and present and future business prospects, and to correct any previously-issued

statements that had become materially misleading or untrue, so that the market price of

the Company's publicly-traded securities would be based upon truthful, complete and

accurate information. The Individual Defendants' misrepresentations and omissions

during the Class Period violated these specific requirements and obligations.

       18.     The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public and shareholder and investor reports and other

communications complained of herein and were aware of, or recklessly disregarded, the

misstatements contained therein and omissions therefrom, and were aware of, or




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recklessly disregarded, their materially false and misleading nature. Because of their

Board membership and executive and managerial positions with Aetna, each of the

Individual Defendants had access to the adverse undisclosed information about Aetna's

business prospects, financial condition and performance as particularized herein and

knew, or recklessly disregarded, that these adverse facts rendered the positive

representations made, issued or adopted by the Company materially false and misleading.

       19.     The Individual Defendants, because of their positions of control and

authority as officers and directors of the Company, were able to and did control the

content of the various SEC filings, press releases and other public statements pertaining

to the Company during the Class Period. Each Individual Defendant was provided with

copies of the documents alleged herein to be misleading prior to or shortly after their

issuance and/or had the ability and/or opportunity to prevent their issuance or cause them

to be corrected. Accordingly, each of the Individual Defendants is responsible for the

accuracy of the public reports and releases detailed herein and is therefore primarily

liable for the misrepresentations and misleading statements contained therein.

       20.     Each of the defendants is liable as a participant in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Aetna common

stock, by disseminating materially false and misleading statements and/or concealing

material adverse facts. The scheme: (a) deceived the investing public regarding the so-

called New Aetna and its tailored comprehensive review of the healthcare business and

implementation of new procedures, controls and initiatives; (b) deceived the investing

public regarding Aetna's financial condition, business, present and future prospects,




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growth, operations and the intrinsic value of Aetna's common stock; and (c) caused

plaintiff and other members of the Class to purchase Aetna common stock at artificially

inflated prices.

                      PLAINTIFF’S CLASS ACTION ALLEGATIONS

        21.        Plaintiff brings this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who

purchased on the open market Aetna common stock between December 1, 2000 and April

9, 2001, inclusive (the "Class Period"), and who were damaged thereby. Excluded from

the Class are defendants, the officers and directors of the Company and its subsidiaries

and affiliates, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which any defendant has

or had a controlling interest.

        22.        The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to plaintiff at this

time and can only be ascertained through appropriate discovery, plaintiff believes that

there are thousands of members in the proposed Class. As of November 24, 2000, Aetna

had over 141 million shares of common stock outstanding. Throughout the Class Period,

Aetna's common stock was actively traded on the NYSE. Record owners and other

members of the Class may be identified from records maintained by Aetna or its transfer

agent and may be notified of the pendency of this action by mail, using the form of notice

similar to that customarily used in securities class actions.




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        23.    Plaintiff’s claims are typical of the claims of the members of the Class as

all members of the Class are similarly affected by defendants' wrongful conduct in

violation of federal laws that are complained of herein.

        24.    Plaintiff will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class and securities

litigation.

        25.    Common questions of law and fact exist as to all members of the Class

and predominate over any questions solely affecting individual members of the Class.

Among the questions of law and fact common to the Class are:

               (a)        Whether the federal securities laws were violated by defendants'

acts as alleged herein;

               (b)        Whether statements made by defendants to the investing public

during the Class Period misrepresented and/or omitted material facts about the financial

condition, business, operations, income, expenses and growth of Aetna; and

               (c)        To what extent the members of the Class have sustained damages

and the proper measure of damages.

        26.    A class action is superior to all other available methods for the fair and

efficient adjudication of this controversy since joinder of all members is impracticable.

Furthermore, as the damages suffered by individual Class members may be relatively

small, the expense and burden of individual litigation make it impossible for members of

the Class to individually redress the wrongs done to them. There will be no difficulty in

the management of this action as a class action.

              APPLICABILITY OF PRESUMPTION OF RELIANCE:




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                      FRAUD-ON-THE-MARKET DOCTRINE

       27.     At all relevant times, the market for Aetna common stock was an efficient

market for the following reasons, among others:

               (a)    Aetna common stock met the requirements for listing, and was

listed and actively traded on the NYSE, a highly efficient and automated market;

               (b)    As a regulated issuer, Aetna filed periodic public reports with the

SEC and the NYSE;

               (c)    Aetna regularly communicated with public investors via

established market communication mechanisms, including regular dissemination of press

releases on the national circuits of major newswire services and other wide-ranging

public disclosures, such as communications with the financial press, securities analysts

and other similar reporting services; and

               (d)    Aetna was followed by several securities analysts employed by

major brokerage firms who wrote reports which were distributed to the sales force and

certain customers of their respective brokerage firms. Each of these reports was publicly

available and entered the public marketplace. Among the brokerage firms which issued

research reports on Aetna during the Class Period were: Salomon Smith Barney, Merrill

Lynch Capital Markets, Credit Suisse First Boston and others.

       28.     As a result, the market for Aetna common stock promptly digested current

information regarding Aetna from all publicly available sources and reflected such

information in Aetna's stock price. Under these circumstances, all purchasers of Aetna

shares during the Class Period suffered similar injury through their purchase of Aetna's




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shares at artificially inflated prices and a presumption of reliance applies. Further,

plaintiff is entitled to and will rely on the presumption of reliance doctrine based on the

material omissions alleged herein.

                                        SCIENTER

       29.     On February 24, 2000 Aetna received a letter from Wellpoint Health

Networks Inc. (“Wellpoint”) and ING America Insurance Holdings Inc. (“ING”)

expressing a desire by those companies to acquire Aetna in a transaction whereby Aetna

shareholders would receive approximately $70 per share in value, comprised of $44 in

cash and $26 in Well Point common stock. Subsequently, the Aetna Board of Directors

in March rejected the offer from ING and Well Point to negotiate an acquisition of Aetna.

Instead, the Board of Directors decided on a series of steps to enhance shareholder value

and the quality of services. The Board of Directors decided to separate the Global Health

and Global Financial services businesses into two separate independent publicly traded

companies. Thus as part of this decision, the Board of Directors undertook a

comprehensive review of Aetna’s health business model and strategies with the goal of

building on their industry leading franchise and improving financial performance and

relationships with physicians, hospitals, and patients. Also, the Board of Directors

decided to accelerate their existing cost-reduction program and additional reductions

resulting from the restructuring and strategic review. Shortly thereafter, Aetna began

negotiating with a number of potential buyers to sell its financial services business and

international assets. In July it was announced that Aetna and ING had reached an

agreement to sell the financial services businesses to ING.




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       30.     Thus, in connection with the decision to sell its financial services and

international businesses to ING and its spin-off of its domestic health care and large case

businesses in the form of New Aetna to its shareholders, defendants Donaldson and Rowe

and others provided numerous interviews to the financial press and attended numerous

analysts meetings installing the virtues of New Aetna. Defendants were motivated to

engage in the fraudulent practices alleged herein in order to, among other things, assure

that they would receive the acquiescence of shareholders to the ING transactions and the

spin-off of New Aetna stock.

       31.     During the 2000 time period, prior to the spin-off and stock

issuance, defendants Donaldson and Rowe received extraordinary financial incentives to

assure the finalization of the ING transaction and the acquiescence of the Old Aetna

shareholders to the spin-off and stock issuance. Donaldson, for 2000, received a salary of

$1,000,000 and a bonus of $6,000,000. Also in 2000, he received a stock option grant of

500,000 Aetna common shares and a grant of 100,00 shares of restricted Aetna common

stock which vested upon the completion of the ING transaction and the spin-off and stock

issuance. Rowe’s employment agreement called for an annual salary of not less than

$1,000,000 and a target annual bonus of at least $1,500,000. For the last three months in

2000, Rowe received salary and bonus of $648,077. Rowe received a spin-off bonus of

$2,000,000 and, on July 3, 2001, he received a retention bonus of $1,400,000. Rowe was

granted 25,000 Aetna restricted stock units and stock options on 500,000 shares of Aetna

common stock. He was entitled to additional and supplemental grants if the ING

transaction and the spin-off and stock issuance were completed. In total, by April 27,




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2001, Rowe held options on 1,246,464 shares on New Aetna common. Rowe is entitled

to a minimum annual pension of $300,000, and generous termination benefits.

       32.     Defendants Donaldson and Rowe had knowledge of preliminary

information regarding New Aetna’s financial and operational weaknesses as they

contrived to complete the ING transaction and the spin-off and stock issuance. They

were motivated to engage in the fraudulent practices alleged herein in order to, among

other things, assure receipt of their bonuses tied to the ING transaction and the spin-off

and stock issuance, maximize their proceeds from their respective employment contracts

and insure their earlier contrivances were not discovered. Thus, they were incentivized to

present Aetna as a viable company.

       33.     In Class Action Complaints filed in late 1997 and litigated in the United

States District Court for the Eastern District of Pennsylvania, MDL Docket NO. 1219,

plaintiffs shareholder alleged that certain Old Aetna officers and directors were liable for

misrepresentations and omissions regarding, among other things, the merger of Old

Aetna with U.S. Healthcare Inc. and the accounting of medical claim reserves. On

January 4, 2001, the Court gave final approval to a settlement requiring the payment of

approximately $83 million. The allegations of that complaint asserted that certain

officers and/or directors had misrepresented the merger integration of Old Aetna with

U.S. Healthcare Inc., and Old Aetna had overstated medical claim reserves. Strikingly,

the integration problems were associated with the incompatibility of computer systems.

Because of this problem Old Aetna had great difficulty in adapting contract analysis,

claims adjudication and reimbursement features. The outcome was that thousands of

claims were lost, claim forms were not processed and a huge backlog of valid claims




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went unpaid. Because unpaid claims were never recorded onto Old Aetna’s books and

records, reserves, which were calculated as a percent of the incorrect claim demand, were

understated. This provided additional demonstration of knowledge by defendants

Donaldson and Rowe. Defendant Donaldson, who joined the Board in 1996, and became

Aetna’s CEO in February 2000, had knowledge of these negative facts pertaining to the

earlier class action when he was actively touting the Company. Rather than assure that

the same problems did not arise, he ignored the indicia of difficulties in paying claims

and misrepresented Aetna as a solid investment.

       34.     As alleged in this Complaint, defendants acted with scienter in that each

knew that the public documents and statements issued or disseminated in New Aetna’s

name were materially false and misleading; each knew that these statements or

documents would be issued or disseminated to the investing public; and each knowingly

and substantially participated or acquiesced in the issuance or dissemination of such

statements or documents as primary violations of the federal securities laws. As stated

throughout this Complaint, because of their receipt of information disclosing and

confirming the true facts concerning New Aetna and its true financial condition, their

control over, and/or receipt, and/or modification or editing of New Aetna’s allegedly

materially misleading misstatements and/or their associations within New Aetna making

them privy to confidential proprietary information of and concerning New Aetna,

participated in the fraudulent scheme alleged herein, and could not have known that the

statements and omissions attributed to them were false or misleading at the time the

statement or omission was made.




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          35.    Additionally, the nature and timing of the announcement of the spin-off

and stock issuance, the false assertions related to “seasoned management,” the false

statements relating to management controls; and the acts and omissions detailed below

combined to show strong evidence of scienter.

          36.    The foregoing allegations concerning defendants’ activities conclusively

show knowledge, because they all occurred during the time when, as defendants have

now admitted, the Company had failed to properly control and monitor its costs and

obligations, and before the time when defendants issued partial disclosures.

                    MATERIALLY FALSE AND MISLEADING
                STATEMENTS ISSUED DURING THE CLASS PERIOD

          37.    In the December 1, 2000 Registration Statement, in describing RECENT

DEVELOPMENTS; STRATEGIC REPOSITIONING OF OUR BUSINESS, defendants

stated:

          Although our businesses are profitable and generate significant cash flow,
          our recent financial performance has been disappointing. . . . We have
          experienced a significant increase in medical costs in the first nine months
          of 2000.

          We are undertaking a comprehensive review of our healthcare business
          model. We have already implemented a number of strategic and operational
          initiatives and are considering a number of additional actions. These include,
          among other things, strengthening management of the business, improving
          relations with healthcare providers, exiting certain product markets,
          addressing rising medical costs and improving the efficiency of our
          operations.

                                        ***

          Further Strengthening Management. In addition to the hiring of Dr. Rowe,
          we have made a number of significant changes to our senior management
          team since year end 1999 to help lead the strategic repositioning of our
          business and the implementation of our other important initiatives. We have
          also taken steps to better empower local, regional management, to address
          more quickly and effectively medical cost and other issues that arise locally,



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       where health care services are ultimately furnished by providers to our
       members.

                                      ***

       Addressing Rising Medical Costs. We are taking a number of steps to
       address the significant increase in medical costs that we have recently
       experienced. Among other things, we are:

       •        implementing premium increases for contracts renewing in the fourth
       quarter of 2000 and beyond that more appropriately reflect the rise in
       medical costs;
       •        redesigning product benefit offerings to offer more appropriate
       consumer choice and incent appropriate, necessary use of medical services
       (i.e., by expanding features such as tiered co-pays);
       •        moving patient management responsibility to our regional operations
       so that we can improve our focus on geographic developments, which can
       vary sharply from one region to another, and more quickly develop and
       implement detailed action plans for each region; and
       •        enhancing our utilization management on-site review program in order
       to resolve coverage issues with hospitals and other providers concurrently
       with, rather than after, treatment.

       Improving the Efficiency of Our Operations. We are reviewing our business
       and operational processes with the goal of increasing efficiencies and
       reducing operational costs. Our goal is to better leverage our information
       technology assets to meet current consumer trends and achieve additional
       efficiencies. We intend to use technology to deliver speed, efficiency and
       accuracy to the traditionally time-and paper-intensive process of
       administering employee benefits for plan sponsors, brokers and members.


       38.     On December 18, 2000, Aetna announced that it had taken a series

of “actions intended to improve profitability and competitiveness.” In this release, issued

over the Business Wire, defendant Donaldson stated: “Last week we completed the sale

of our financial services and international businesses. Now that we are solely focused on

health care and related benefits, we are taking a number of initiatives designed to

improve customer service, strengthen the profitability of Aetna and increase our

competitiveness. These actions better align our business structure with the needs of all




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our constituents and should help get our costs more in line with our new business focus.”

One of the initiatives included “overall improvements in the efficiency of claim and

members services processes to reduce administrative hassles and ‘get it right the first

time.’ The changes are designed to result in a claims payment system that is more

effective, in terms of both costs and results.” The stock market reacted positively to this

announcement, closing at $36.8125 on December 18, 2000, up $3.8125 from the close on

December 15, 2000.

       39.     On December 18, senior management held a conference call in which the

Company expressed comfort with GAAP EPS in the $1.20-$1.30/per share range for

2001 based on management’s achieving MCR improvement in 2001. During this

conference call, defendant Donaldson listed several problematic policies and approaches

that management has determined are no longer appropriate in the rapidly changing

managed care environment. As a result, these former policies and approaches are

currently under review including:

       •       Emphasis on top-line growth and market share that led to

               underpricing in the commercial risk business;

       •       Broker and sales force incentives that rewarded membership

               growth instead of margin growth;

       •       Deteriorating customer service and satisfaction;

       •       Provider contract rigidity (i.e., the member and provider hassle

               factor);

       •       Limited new product innovations; and

       •       Highly centralized management structure that prohibited the




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               company from reacting to local member and provider needs.

        40.    Following defendant Donaldson’s comments, defendant Rowe outlined

three overlapping time periods with respect to the implementation of Aetna’s strategic

plan:

        Period 1: Early 2000 Through the Fourth Quarter of 2000

        Period 1 includes events up to and including the closing of the ING
        transaction in the fourth quarter of 2000. Aetna has already achieved its
        previously stated goal of $100 million to $150 million in cost savings.

        Period 2: “Transition Period” - Third Quarter of 2000 Through the
        Second Quarter 2001

        The company will undertake two types of specific actions: 1) those aimed
        at improving the financial performance and profitability of the company and
        2) those that will facilitate the implementation of the company’s new strategic
        plan. These include:

        •      Withdrawal from selected Medicare & Choice service areas in
               2001;

        •      Withdrawal from identified commercial HMO markets that have
               not been profitable and that are not of key strategic value to
               the company;

        •      Implementation of significant price increases, effective January
               1, 2001;

        •      Completion of the previously announced Phase I cost
               reductions for the year 2000;

        •      Development of additional significant cost reductions for 2001
               of at least 2x the targeted Phase I cost reductions; and
        •      Enhance medical cost controls by converting the company to
               a more regionally managed organization.

        Period 3: Strategic Plan, 2001

        Beginning in 2001, Aetna is implementing a new strategic plan designed to
        improve the company’s infrastructure. Specific steps to be undertaken
        include:




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       •       Repairing relations with physicians, hospitals, plan sponsors,
               consultants, brokers, and other strategic partners;

       •       Reorganizing administrative systems and reengineering of
               business processes and service elements; and

       •       Strengthening the management structure of the company to
               am ore closely align skill sets with the tasks at hand.

       41.     On January 30, 2001, Aetna reported its fourth quarter 2000

operating earnings from continuing operations of $28.7 million or $.20 per common

share, compared with the third quarter 2000 operating earnings of $42.3 million or $0.30

per common share. Commenting on the earnings, defendant Donaldson stated:

       The fourth quarter marked the end of a year of significant change for Aetna.
       In 2000, we embarked on a course of action to return value to shareholders
       and restore Aetna to its leadership position....

                              ***

       We also began the process of building the new Aetna, restructuring our
       health business around the key themes of choice, flexibility, quality and
       responsiveness and improving our competitiveness with a series of strategic
       initiatives. All the while, we have charted a course for change that ultimately
       should lead to a profound transformation in the way we do business. Our
       transition is on track, and the New Aetna has been born. We look forward
       to demonstrating a heightened ability to better serve our customers, improve
       financial results and fulfill our mission as an industry leader in 2001 and
       beyond.

Defendant Rowe further stated:

       Our efforts to improve our business are well under way, and we are making
       considerable progress on our strategic initiatives. We are eliminating
       targeted unprofitable membership, most notably in Medicare. We are
       proceeding with plans to reduce expenses accordingly, eliminate duplicative
       staff functions, and improve the efficiency of claim and member services
       processes. The redesign of our sales force to increase its effectiveness and
       place greater emphasis on high-potential middle-market business should
       enhance our sales results. We also continue to focus on the fundamentals
       of pricing and effective medical cost management.

Aetna’s reported results were false and misleading because they failed to include



                                            20
appropriate medical expense reserves and, thus, artificially inflated Aetna’s reported

income.

       42.     During the conference call with analysts and investors, also on January 30,

2001, defendants again expressed their comfort with GAAP EPS of $1.20-$1.30 for 2001,

and stated that the current trend in its commercial HMO business was about 12% and that

commercial HMO cost trends would be approximately 10% in 2001. Management also

stated that the premium rate increases implemented in 2001 were in line with

expectations and that the Company would be able to achieve improvement in its HMO

MCR. Defendants emphasized that the company has been able to improve its

relationships with its contracted network providers, eliminating unpopular contract

language and augmenting its traditional utilization management techniques with case

management, disease management and concurrent review, and reducing its reliance on

precertification, referrals and retrospective review.

       43.     Contrary to their prior representations of having made significant progress

in improving competitiveness, controlling costs and improving the efficiency of the

claims process, in a surprise to the market, on April 10, 2001, defendants announced that

Aetna’s first quarter 2001 results were expected to be significantly lower than estimated,

as a result of increased medical costs due to higher utilization of healthcare services in

the fourth quarter 2000 and the first quarter 2001. The Company announced that it

expected to record in the first quarter approximately $90 million before tax of additional

medical costs related to services performed in prior periods, primarily the fourth quarter

of 2000. The remainder reflected a fourth quarter commercial HMO medical cost trends,




                                             21
based on current information, of approximately 13%, compared to the 12% that was

estimated previously.

        44.     As a result of this announcement on April 10, 2001, Aetna’s stock price

fell by $7.40 per share, or 20%.

        45.     Subsequently, at a June 7, 2001 Sanford C. Bernstein investor conference,

defendant Rowe admitted that Aetna had lost millions of dollars through overpayment of

claims or paying single claims multiple times and paying medical bills for people who are

no longer members.

        46.     As set forth above, the market for Aetna's common stock was open,

well-developed and efficient at all relevant times. As a result of the materially false and

misleading statements and failures to disclose described above, Aetna common stock

traded at artificially inflated prices throughout the Class Period until the true state of

Aetna's financial condition and business was communicated to and reasonably

understood by the securities markets. Plaintiffs and other members of the Class purchased

or otherwise acquired Aetna common stock relying upon the integrity of the market price

of Aetna common stock and market information relating to Aetna, as well as reliance

presumed by a material omission, and have been damaged thereby.

        47.     During the Class Period, defendants materially misled the investing

public, thereby inflating the price of Aetna common stock, by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make

defendants' statements, as alleged above, not false and misleading. Said statements and

omissions were materially false and misleading in that they failed to disclose material




                                              22
adverse information and misrepresented the truth about the Company, its business,

operations and financial condition as alleged above, including, inter alia:

       (a)     Defendants' sale of the financial services businesses to ING and focus

on the healthcare business was not leading, and would not lead, Aetna to achieve higher

earnings and cost savings from reduced medical costs and enhanced revenue in 2001

because, inter alia, in the aftermath of the sale, medical claims and medical expenses

were rising significantly, requiring Aetna to take an additional charge to earnings in

excess of $90 million which would reduce materially Aetna's earnings in the first quarter

of 2001. In the first quarter, defendants belatedly reported a charge of $90 million, which

should have been recorded in the fourth quarter of 2000. Defendants' delay in reporting

these expenses and failure to timely and properly reserve for the enormous amount of the

Company's unpaid medical expense liabilities, falsely inflated Aetna's earnings during the

fourth quarter of 2000, thereby enabling defendants to tout falsely the financial success of

the sale and spinoff.

       (b)     Aetna was experiencing escalating medical costs due to overpayment

of medical claims; inadequate pricing for risk enrollment; adverse selection; increasing

short term utilization based on less restrictive utilization controls and shifts in products;

and unfavorable reserve runoff due to exits of certain Medicare markets.

       (c)     Aetna had failed to take appropriate medical expense reserves and,

thus, inflated its reported income.

       48.     Since, as discussed in detail above, managed healthcare organizations

frequently pay medical claims after the end of a particular accounting period and a

fundamental precept of accounting requires that expenses be matched with their related




                                              23
revenues, such a company is required to establish a liability (i.e., Medical Claims

Reserves) to account for medical expenses incurred by it during an accounting period

which remain unpaid at the end of the accounting period. In determining liabilities for

incurred but unpaid medical expenses, it is necessary for such a company to establish a

reserve for those claims that are both reported (RBNP) and unreported (IBNR) to the

company by medical service providers at the end of the accounting period.

       49.     As detailed above, the myriad of ongoing undisclosed serious problems,

which were known to, or recklessly disregarded by defendants, caused the Company to

fail to account for a material amount of medical claims which were reported to Aetna by

medical services providers. Accordingly, Aetna's medical expenses and Medical Claims

Reserves reported in the Class Period financial statements were materially understated

because Aetna failed to account for a material amount of RBNP claims. In addition,

defendants knew, or were reckless in not knowing, that Aetna's failure to timely account

for its RBNP claims distorted the Company's calculation of IBNR claims.

       50.     Thus, defendants knew or were reckless in not knowing that when

the Company failed to account for a material amount of medical claims due to the

Company's ongoing integration problems, its ability to properly calculate RBNP and

IBNR claims was seriously impaired. As a result, Aetna's calculation of its Medical

Claims Reserves and medical expenses during the Class Period became merely a guess,

which was not based on sound and complete actuarial analysis. Aetna's 2000 fourth

quarter and year-end financial statements were false and misleading because Aetna

materially under reserved for its Medical Claims Reserves in its financial statements by

failing to take into account the claims that the Company knew or could reasonably expect




                                            24
would be presented for payment. As a result, defendants also knew, or were reckless in

not knowing, that Aetna's under reserving of medical claims caused the Company's

reported medical expenses in the financial statements to be materially understated and

mislead the market by masking the facts that: Aetna’s medical claims reserves were

materially understated; that the improvements and efficiencies from the spinoff of the

financial services business and the focus on the healthcare businesses were not generating

either significant cost savings or improved operating earnings; and that medical costs

were rising dramatically. Accordingly, Aetna's Class Period financial statements were

materially false and misleading and misrepresented the Company's true operating results

and falsely inflated Aetna's earnings during the fourth quarter of 2000.

                                     FIRST CLAIM
                    (Violations Of Section 10(b) Of The Exchange Act
                    And Rule 10b-5 Promulgated Thereunder Against
                                     All Defendants)

          51.   Plaintiff repeats and realleges each and every allegation contained above

as if fully set forth herein.

          52.   During the Class Period, Aetna and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and,

throughout the Class Period, did: (a) deceive the investing public, including plaintiff and

other Class members, as alleged herein; (b) artificially inflate and maintain the market

price of Aetna common stock; and (c) cause plaintiff and other members of the Class to

purchase Aetna common stock at inflated prices. In furtherance of this unlawful scheme,

plan and course of conduct, defendants, and each of them, took the actions set forth

herein.

          53.   Defendants: (a) employed devices, schemes, and artifices to defraud; (b)



                                            25
made untrue statements of material fact and/or omitted to state material facts necessary

to make the statements not misleading; and (c) engaged in acts, practices, and a course

of business which operated as a fraud and deceit upon the purchasers of the Company's

common stock in an effort to maintain artificially high market prices for such stock in

violation of Section 10(b) of the Exchange Act and Rule 10b-5. The Individual

Defendants are sued as primary participants in the wrongful and illegal conduct charged

herein and as controlling persons as alleged below.

       54.     In addition to the duties of full disclosure imposed on defendants as a

result of their making of affirmative statements and reports, or participation in the making

of affirmative statements and reports to the investing public, the defendants had a duty to

promptly disseminate truthful information that would be material to investors in

compliance with the integrated disclosure provisions of the SEC as embodied in SEC

Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and Regulation S-K (17 C.F.R.

Sections 229.10 et seq.) and other SEC regulations, including accurate and truthful

information with respect to the Company's operations, financial condition and earnings so

that the market price of the Company's common stock would be based on truthful,

complete and accurate information.

       55. Aetna and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means or instrumentalities of interstate commerce and/or of the

mails, engaged and participated in a continuous course of conduct to conceal adverse

material information about the business, operations, future prospects and financial

condition, of Aetna as specified herein. These defendants employed devices, schemes and

artifices to defraud, while in possession of material adverse non-public information and




                                            26
engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure

investors of Aetna's value and performance and continued substantial growth, which

included the making of, or the participation in the making of, untrue statements of

material facts and omitting to state material facts necessary in order to make the

statements made about Aetna and its business operations and future prospects in the light

of the circumstances under which they were made, not misleading, as set forth more

particularly herein, and engaged in transactions, practices and a course of business which

operated as a fraud and deceit upon the purchasers of Aetna common stock during the

Class Period.

       56.      Each of the Individual Defendants' liability arises from the following

facts: (a) the Individual Defendants were high-level senior executives and directors at the

Company during the Class Period and members of the Company's management team or

had control thereof; (b) each of these defendants, by virtue of his responsibilities and

activities as a senior officer and director of the Company, was privy to and participated in

the creation, development and reporting of the Company's internal budgets, plans,

projections and/or reports; (c) each of these defendants enjoyed significant personal

contact and familiarity with the other defendants and was advised of and had access to

other members of the Company's management team, internal reports and other data and

information about the Company's finances and operations at all relevant times; and (d)

each of these defendants was aware of the Company's dissemination of information to the

investing public which they knew, or recklessly disregarded, was materially false and

misleading.

       57.      The defendants had actual knowledge of the misrepresentations and




                                             27
omissions of material facts set forth herein, or acted with reckless disregard for the truth

in that they failed to ascertain and to disclose such facts, even though such facts were

available to them. Such defendants' material misrepresentations and/or omissions were

done knowingly or recklessly and for the purpose and effect of concealing Aetna's

operating and financial condition and future business prospects from the investing public

and supporting the artificially inflated price of its securities. As demonstrated by

defendants' misstatements of the Company's financial statements, business, operations

and earnings throughout the Class Period, defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to

discover whether those statements were false or misleading.

       58.     As a result of the dissemination of the materially false and

misleading information and failure to disclose material facts, as set forth above, the

market prices of Aetna common stock were artificially inflated during the Class Period.

In ignorance of the fact that market prices of Aetna's publicly traded securities were

artificially inflated, and relying directly or indirectly on the false and misleading

statements made by defendants, or upon the integrity of the market in which the securities

trade, and/or on the absence of material adverse information that was known to or

recklessly disregarded by defendants but not disclosed in public statements by defendants

during the Class Period, plaintiff and the other members of the Class acquired Aetna's

common stock during the Class Period at artificially high prices and were damaged

thereby.

       59.     At the time of said misrepresentations, plaintiff and other members of the




                                              28
Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the

other members of the Class and the marketplace known of the true financial condition

and business prospects of Aetna, which were not disclosed by defendants, plaintiff and

other members of the Class would not have purchased or otherwise acquired their Aetna

common stock during the Class Period, or, if they had acquired such securities during the

Class Period, they would not have done so at the artificially inflated prices which they

paid.

        60.     By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

        61.     As a direct and proximate result of defendants' wrongful conduct, plaintiff

and

        the other members of the Class suffered damages in connection with their

purchases of the Company's common stock during the Class Period.

                                    SECOND CLAIM
                     (Violation Of Section 20(a) Of The Exchange Act
                           Against The Individual Defendants)

        62.     Plaintiff repeats and realleges each and every allegation contained above

as if fully set forth herein.

        63.     The Individual Defendants acted as controlling persons of Aetna within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their

high-level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company's operations and/or intimate knowledge of the Company's

finances and status of the merger integration, the Individual Defendants had the power to

influence and control and did influence and control, directly or indirectly, the




                                             29
decision-making of the Company, including the content and dissemination of the various

statements which plaintiff contends are false and misleading. The Individual Defendants

were provided with or had unlimited access to copies of the Company's reports, press

releases, public filings and other statements alleged by plaintiff to be misleading prior to

and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

       64.      In particular, each of these defendants had direct and/or supervisory

involvement in the day-to-day operations of the Company and, therefore, is presumed to

have had the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein, and exercised the same. The Individual Defendants

culpably participated in the commission of the wrongs alleged herein.

       65.      As set forth above, Aetna and the Individual Defendants each

violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this

Complaint. By virtue of their positions as controlling persons, the Individual Defendants

are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result

of defendants' wrongful conduct, plaintiff and other members of the Class suffered

damages in connection with their purchases of the Company's common stock during the

Class Period.

                WHEREFORE, plaintiff prays for relief and judgment, as follows:

                (a) Determining that this action is a proper class action and certifying

Lead Plaintiff as a class representative under Rule 23 of the Federal Rules of Civil

Procedure;

                (b) Awarding compensatory damages in favor of plaintiff and the




                                             30
other Class members against all defendants, jointly and severally, for all damages

sustained as a result of defendants' wrongdoing, in an amount to be proven at trial,

including interest thereon;

               (c) Awarding plaintiff and the Class their reasonable costs and

expenses incurred in this action, including counsel fees and expert fees; and

               (d) Granting such other and further relief as the Court may deem just

and proper.

                              DEMAND FOR A JURY TRIAL

       Plaintiff hereby demands a trial by Jury.




Date: December 5, 2001                       THE ROSEN LAW FIRM, P.A.P.C.




                                             By:_________________________
                                             Laurence Rosen, Esq. (LR-5733)
                                             232 Madison Avenue, Suite 906
                                             New York, New York 10016
                                             Tel: (212) 532-7299
                                             Fax: (212) 202-3827
                                             lrosen@rosenlegal.com




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