Former CEO to pay United investors $30 million

William McGuire, MD, further whittles down his holdings in a third settlement over stock options.

By Emily Berry — Posted Oct. 6, 2008

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Former UnitedHealth Group Chair and CEO William McGuire, MD, has agreed to forfeit another portion of the fortune he amassed during the 17 years he led the company, settling with investors in a lawsuit over alleged stock-option backdating.

Under the agreement, Dr. McGuire will pay $30 million to United investors in a class-action lawsuit led by a California pension fund and will surrender options to purchase 3.65 million shares of stock granted between 2003 and 2005. At mid-September's stock prices, those shares would be worth about $100 million. The case had been set for trial in September.

"In effect, this was an example of runaway executive compensation," said Peter Mixon, general counsel for the California Public Employees' Retirement System (CalPERS).

The CalPERS agreement is the third settlement involving the former CEO regarding alleged improper stock option backdating.

Backdating, the practice of retroactively assigning the grant date to a day the stock was at a low value, allows for automatic profit when options are sold at a higher price. It is not illegal, but investors are supposed to be informed when a company backdates stock options.

United already had agreed to pay $895 million to the same plaintiffs and is awaiting final approval of that deal by a federal judge. Former United General Counsel David Lubben also settled, paying $500,000 to plaintiffs.

Dr. McGuire did not admit wrongdoing; nor has he done so in any previous settlement. In a December 2007 settlement with the Securities and Exchange Commission, Dr. McGuire agreed to pay the SEC a $7 million fine, return $11 million in what the SEC called "ill-gotten gains," plus $1.7 million in interest, while also returning stock options and cash to United.

Dr. McGuire also reached a settlement with a special litigation committee representing United shareholders, agreeing to pay back $8.1 million in bonus pay, $91 million in retirement benefits and $320 million in stock options, which was deemed as satisfying the terms of the SEC agreement.

Dr. McGuire already had given back $198 million in options upon his resignation in November 2006.

The settlement with the special litigation panel was awaiting a final OK from a federal judge in September.

The Internal Revenue Service and the U.S. Dept. of Justice both have investigations into United's past stock-option grant practices still pending, and Dr. McGuire still could face criminal charges from the U.S. attorney in the Southern District of New York.

Dr. McGuire's remaining stock options were still frozen by court order as of September, pending resolution of the suits against him. He now has 20 million stock options that could earn him more than $300 million.

A news release announcing the settlement said the former CEO continues to work in the health care sector. Under the terms of his SEC agreement, he is barred from serving as a corporate officer or director of a public firm for 10 years.

United has adopted new standards for granting stock options, repriced options previously granted to current executives and revised past earnings statements by more than $1.5 billion. United spokesman Tyler Mason had no comment on the new settlement.

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