SEC takes closer look at United's stock-option grants

United HealthGroup has revealed that the Securities and Exchange Commission is stepping up its investigation into the health plan's past options grants to top executives.

In an SEC filing on Dec. 26, 2006, United said it had "received from the SEC staff a formal order of investigation" on Dec. 19. That represents a step up from the informal investigation the company launched in April 2006 into the company's backdating of stock options to top executives.

The difference between a formal and informal SEC investigation is that the former gives the SEC subpoena power, while the latter is a preliminary look that does not require witnesses to issue sworn statements or be forced to testify. If after the formal investigation the SEC believes it has a case against United, the agency can bring the case to an administrative law judge, the Justice Dept. (if criminal activity is alleged) or both.

United has acknowledged that it engaged in backdating stock options, though it says it does not engage in the practice anymore. In a Dec. 19, 2006, presentation to investors, the Minnetonka, Minn.-based company said it might have to adjust earnings between 1994 and 2005 downward by up to $1.7 billion because of backdating to executives. The beneficiaries include former CEO and Chair William McGuire, MD, who resigned as of Dec. 1 as criticism mounted over how he was able to amass $1.8 billion in stock options.

Dr. McGuire said upon his departure that he would return $200 million in stock options already exercised that were linked to backdating, based on a company investigation. Dr. McGuire's successor as CEO, Stephen Helmsley, said he would return $190 million in unrealized and realized gains.

But United is not discussing the backdating investigations publicly. Nor is the SEC. In its Dec. 26 SEC filing, United said the company "has cooperated and will continue to cooperate with the SEC." Like many firms whose names have been linked with backdating, United also is fighting shareholder lawsuits alleging malfeasance in granting stock options.

Stock options are contracts that allow their holder to buy stock at a certain price on a future date. The share price is supposed to be based on the date on which the options were granted. But United and about 200 other companies either conducting internal investigations, or being investigated by the SEC, Justice Dept. or others, are alleged instead to have based those prices on the lowest share price of the previous year.

Critics of backdating -- which is legal only if shareholders are informed in advance, and the backdating is accounted for in earnings and taxes -- say the practice perverts the idea of granting stock options, which is to give executives an incentive to improve the company and its stock price.

Instead, they say, options are being used as a way to bump up executive pay without demanding results to go with it.

In United's case, though, the company's value grew exponentially under Dr. McGuire in his 15-year tenure. It became the second-largest private health plan in the country, behind Indianapolis-based WellPoint -- all the while with organized medicine saying United and others grew at the expense of physicians whose reimbursement got squeezed by ever-consolidating plans.

Investors have shrugged at United's latest revelation, with its stock remaining stable despite its announcement of the SEC's formal probe. Analysts say it's because they believe the company is still strong and that the earnings readjustment United is discussing is only about 8% of past earnings. The company also told investors on Dec. 19 that it expects net income of $4.75 billion in 2007 -- up 13% from 2006's $4 billion.

As of yet, United is the only national health plan ensnared in backdating investigations. But other health-related companies are facing scrutiny over their options practices.

Pediatrix, a Sunrise, Fla.-based physician practice management company focusing on pediatric subspecialities, has said in prepared statements that it is conducting an internal investigation into what its audit committee determined was a minimum $28 million in excessive compensation based on options backdating between 1995 and 2006. Pediatrix also said it had contacted the SEC and that it was cooperating with the agency in an informal investigation.

Pharmacy benefits manager Caremark Rx, set to be acquired by drugstore chain CVS for $21 billion -- acknowledged in May that it was the subject of an SEC informal investigation into backdating.

The Justice Dept. also has issued subpoenas looking into Caremark. The Nashville, Tenn.-based company has denied any wrongdoing, as has dialysis center operator Renal Care Group, also the subject of an SEC informal investigation.

Meanwhile, Biomet, a medical device maker in Warsaw, Ind., that is set to be taken private in a $10.9 billion buyout, said it would delay its next quarterly filing because it had launched an internal investigation into stock-option backdating.