SEC probes backdating of stock options

Health firms are among 30 companies investigated for giving possibly illegal pay boosts to their executives.

By Bob Cook — Posted June 19, 2006

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UnitedHealth Group, whose CEO has come under scrutiny for what appears to be fortuitously timed stock options worth $1.6 billion, isn't the only health care company whose name comes up when the subject turns to so-called "backdating" of stock options.

CaremarkRx, a pharmacy benefits manager, Renal Care Group, a dialysis company, and United, the nation's second largest private health plan, are among the 30 companies publicly identified as being under investigation by the Securities and Exchange Commission or other federal authorities over how they compensated their top executives.

At issue is how companies timed the awarding of options, which allow holders to buy stock at a predetermined strike price, no matter what the actual trading price. Investigators are looking into whether the companies illegally set the strike price back to the year's previous lowest stock price rather than to a preset date. That would allow executives to buy low and sell high without having to time the market themselves, thus giving them a fatter compensation.

Securities experts say backdating is not necessarily illegal. A company can backdate options if, say, such a practice was properly approved by its board and spelled out to shareholders in regulatory filings.

CaremarkRx and Renal Care Group have denied any wrongdoing. United has said it will not comment on any ongoing investigations, although in May it announced it would stop granting options to top executives.

On May 31, the Wall Street Journal identified one more health company as having backdated options: HealthSouth, still trying to dig out from a $2.7 billion accounting scandal. The company told the Journal that it won't comment on the charges, but that it is cooperating with investigators.

Most experts say backdating options was a practice that stopped upon the 2002 passage of the Sarbanes-Oxley law. It cut to two days, from 45 days, the time company insiders must report to the SEC the options they receive, as well as their effective date.

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