Former United CEO settles in case charging stock backdating

William McGuire, MD, and UnitedHealth Group face other civil and criminal inquiries into how executives maximized their stock options.

By Emily Berry — Posted Jan. 7, 2008

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UnitedHealth Group's former CEO and board chair has settled with the company and the Securities and Exchange Commission over allegations that he benefited from an illegal scheme to maximize what he earned in stock options. But legal troubles remain for both William McGuire, MD, and United.

On Dec. 5, 2007, Dr. McGuire settled with the Securities and Exchange Commission and with pension funds that had brought a lawsuit against him over backdating of stock options, which was alleged to have occurred from 1994 to 2005. The SEC settlement totaled $468 million, the largest ever resulting from options backdating.

Though Dr. McGuire admitted no wrongdoing, the size of the settlement "reflects the magnitude and scope of Dr. McGuire's misconduct," Linda Chatman Thomsen, director of the SEC's enforcement division, said in a prepared statement.

Of that total, $7 million was a civil fine paid to the SEC, another $12.7 million was a return of what the SEC called "ill-gotten gains," and the remainder was a forfeiture of options already issued. The SEC settlement also bars Dr. McGuire from serving as an officer or director in a public company for 10 years.

In the lawsuit settlement, Dr. McGuire agreed to reimburse United for $448 million in options and cash, on top of $200 million in options he gave back upon resigning from United in November 2006, after 15 years with the company. The SEC said the lawsuit settlement, which needs to be reviewed and approved by a U.S. District Court judge in Minnesota, was sufficient to cover the forfeiture it had ordered.

The lawsuit covered other United executives as well. Former general counsel David Ludden agreed to give up $28 million in options, while William Spears, former head of the United board's compensation committee, agreed to submit to binding arbitration to decide his settlement figure. Neither admitted wrongdoing.

Separately, current CEO Stephen Hemsley is in the process of repricing past options, reducing their value by $50 million, on top of $190 million in options he already has surrendered to United. Hemsley, before the settlements, had apologized on behalf of the company for the backdating issues.

Backdating occurs when the strike price of stock options, which is usually predetermined to coincide with a specific date, is adjusted to another date -- usually, the one that coincides with the company's lowest stock price of the previous 52 weeks.

Backdating is not illegal if the company informs shareholders in advance that such a plan is in place. But the SEC has investigations under way of at least 14 other companies for doing this, or having boards do it for them, without notifying shareholders. Also, the extra gains from backdating weren't reflected in company earnings, thus causing company profits to be reported as higher than they were, which has caused United and other companies to restate past quarterly statements.

The SEC said Dr. McGuire was the first executive sanctioned under the clawback provision of the Sarbanes-Oxley act, passed in 2002 in the fallout from the collapse of Enron. That provision requires executives to return bonus compensation paid while a company misstated earnings.

In a prepared statement, Dr. McGuire said: "The last 18 months have been an extraordinarily challenging period for my family and me. I am very pleased to have reached a resolution that puts these matters to rest.

"I am extremely proud of all that our team accomplished at UnitedHealth Group to improve health care and build a highly successful and innovative company, and I wish the company well in fulfilling its mission."

However, United and Dr. McGuire still have plenty of legal battles left.

The SEC is continuing its investigation into the company's conduct. The Dept. of Justice still has an ongoing criminal probe into Dr. McGuire and United.

Individual shareholder lawsuits in state and federal courts are pending.

On Dec. 3, United lost a bid to shield itself from a state inquiry into Dr. McGuire's backdating.

Minnesota Attorney General Lori Swanson won permission from the state's Court of Appeals to dig into United's business, as the panel upheld a district court decision allowing her access to UnitedHealth Group records, originally demanded in June 2006.

United had argued that Swanson's request was too vague.

"We are still in the process of reviewing the Court of Appeals' opinion and assessing our options, but we are pleased that the court recognized [that] the attorney general's authority to conduct pre-complaint discovery is limited," United spokesman Tyler Mason said in an e-mailed statement.

And while Dr. McGuire still has an estimated $800 million in stock options at his disposal, those are frozen. A federal judge in December 2007 extended a year-long freeze indefinitely, pending resolution of a federal case brought by United shareholders.

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