ParfumGigi@aol.com

Joshua Freed

The Associated Press

12-10-2007

Getting former CEO William McGuire to give back hundreds of millions of dollars in tainted stock options cures one of UnitedHealth's biggest headaches from its backdating scandal. But there are others.

McGuire agreed to a settlement the Securities and Exchange Commission valued at $468 million, including giving back $320 million in stock options. He had already agreed to reprice some stock options, reducing their value by another $200 million.

That and a $7 million civil penalty was enough to get the SEC to settle with him. But the SEC said its investigation of the company is continuing, and a review by the U.S. Attorney for the Southern District of New York is also outstanding.

UnitedHealth Group Inc. has been trying to put the matter behind it, adopting numerous governance reforms last year and adding independent directors. Current CEO Stephen Hemsley has apologized for the scandal and agreed last year to reprice or give back $189 million worth of stock options to remove the possibility that he benefited from backdating.

McGuire ran UnitedHealth for 15 years, turning a regional insurer into what is now the nation's second-largest managed care company. Like many other companies in the 1990s, UnitedHealth rewarded its chairman and CEO with options giving him the right to buy UnitedHealth shares at a fixed price. The value of those options skyrocketed along with the company's share price. McGuire's unexercised options were worth more than $1.75 billion at the end of 2005.

McGuire was allowed to choose the dates for his option awards. The crux of the backdating accusation is that, to boost the options' value, he picked a date in the past when the share price was lower and signed papers as if he was granted the options on that earlier date. That hands the recipient an instant profit but needs to be disclosed to avoid accounting -- and, potentially, legal -- headaches.

The settlement announced Thursday resolves a lawsuit brought by shareholders on behalf of the company, as well as a civil complaint by the SEC. The SEC said McGuire did not admit or deny guilt.

The settlement includes a $7 million civil penalty for the SEC and reimbursement to the Minnetonka-based insurer for all incentive-and equity-based compensation he received from 2003 through 2006, the SEC said.

The agency said it was the largest penalty assessed against a person in an options backdating case. 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 statement.

A law firm hired by the company concluded last year that McGuire probably received backdated stock options. But the SEC pointed a finger directly at McGuire.

It alleged that from at least 1994 through 2005, "McGuire looked back over a window of time and picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the company's common stock, resulting in grants of in-the-money options."

The SEC began investigating backdated options in 2006, following a series of reports in The Wall Street Journal, one of which focused on UnitedHealth. At least 104 companies are currently under SEC or Department of Justice scrutiny for backdating, according to an AP review.

McGuire stepped down in November 2006 as the highest-profile corporate chief caught in the probe. He will give up $320 million in stock options and forgo more than $99 million in other retirement and executive savings benefits, the company said. He also agreed to give up use of the company plane and company-funded life and health insurance he would have been eligible for under his employment agreement.

"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," McGuire said in a written statement.

The settlement, if it's approved by a federal judge, would resolve a lawsuit brought by several pension plans on behalf of the company and its shareholders. Chad Johnson, an attorney for pensions including the St. Paul Teachers Retirement Fund and public worker pensions in Mississippi, Colorado, Florida and Louisiana, said they were focused on improving UnitedHealth's practices. That has happened, he said.

"It's not just about the dollars and cents, although that's important. They were focused on the housecleaning," he said.

The settlement was reached after months of mediated talks between McGuire and a "special litigation committee" of two former Minnesota Supreme Court justices appointed by UnitedHealth's board to figure out what legal remedies the company should pursue against McGuire.

But although the committee extracted the settlement, it never ruled on the accusations, saying only that "some of the claims against Dr. McGuire may have merit" but the cost and risk of suing him might not be worth it.

The justices wrote that their ability to evaluate McGuire's potential defenses was "hampered by his unavailability for an interview." They interviewed 50 other people over more than a year, including former UnitedHealth director and U.S. Vice President Walter Mondale, along with Hemsley, the current CEO.

UnitedHealth also said former general counsel David Lubben will surrender $3 million worth of stock options and repay $20.5 million he got by exercising stock options in March of this year -- a period when McGuire's stock options were frozen by a federal judge because of the shareholder lawsuit.

An arbitrator will determine a settlement amount for former director William G. Spears. Lubben's retirement and Spears' resignation were announced the same day that McGuire's departure was announced in October 2006.

Spears, who was listed as an independent director, resigned after it was disclosed that he served as a trustee for McGuire's children's trusts and as an investment manager for McGuire and his family, with as much as $55 million under management in 2006.