Thursday, December 6, 2007

UnitedHealth's Former Chief to Repay $600 Million (Update3)

By Margaret Cronin Fisk and Avram Goldstein

Dec. 6 (Bloomberg) -- UnitedHealth Group Inc.'s former Chief Executive Officer William McGuire agreed to repay more than $600 million to reimburse the company over claims he improperly received backdated stock options.

Other current and former officers would pay about $300 million in a settlement of a lawsuit filed against the executives in 2006 by pension funds in Ohio and other states, UnitedHealth said today in an e-mailed statement. McGuire also reached a settlement with the U.S. Securities and Exchange Commission.

If approved by a court, the settlement with the pension funds would be the largest ever in a ``derivative'' suit, in which investors seek reimbursement on behalf of a company, according to data compiled by Bloomberg. Attorneys for plaintiffs in the case said current UnitedHealth CEO Stephen J. Hemsley will repay $240 million, although UnitedHealth said he did so voluntarily months ago.

The lawsuit claimed McGuire, Hemsley and 18 other officers and directors engaged in a ``fraudulent options scheme'' to provide company officers with ``billions of dollars of windfall compensation at the direct expense of UnitedHealth.''

McGuire's attorney David Brodsky didn't immediately return a phone call seeking comment.

UnitedHealth of Minnetonka, Minnesota, the biggest U.S. health insurer, reported in December 2006 that the SEC had begun a formal probe of the company's stock-options practices. Backdating, the setting of the date of options to a point when the stock's price was near a low, raises the potential value to the holders of the options. The practice imposes costs on the company and may violate securities laws, according to lawyers.

Forced to Resign

McGuire was forced to resign as chairman and CEO of UnitedHealth in October after an independent law firm found evidence he participated in setting the dates for his stock options, magnifying their value. At one point, his vested shares were valued at $1.6 billion.

The law firm, Wilmer Cutler Pickering Hale and Dorr LLP of Washington, reviewed 29 option grants over 12 years and found that the measurement dates for most were incorrect and many ``were likely backdated.''

The company promoted Hemsley to CEO, named a new chief financial officer and restated earnings since 1994, reducing them by $1.53 billion.

The Ohio pension fund and other investors filed the suit in March 2006 on behalf of the company, seeking reimbursement and damages from the individual officers and directors. Other shareholders have filed a separate class-action lawsuit against the company, alleging securities fraud over the practices.

Special Committee

Chief Judge James Rosenbaum of the U.S. District Court in Minnesota in March granted the defendants' motion to delay pursuit of the lawsuit, while a special litigation committee investigated allegations raised by the shareholders.

Rosenbaum issued a preliminary injunction in November 2006, stopping McGuire from exercising any UnitedHealth stock options without court approval until July. He later extended this order, with the injunction expiring today or when the litigation committee delivered its report.

The Minnesota Attorney General's office is pursuing a separate civil investigation of UnitedHealth's options practices. A Minnesota appeals court Dec. 4 denied UnitedHealth's appeal ordering the company to turn over documents to the Attorney General's office.

Since the scandal erupted in March 2006, UnitedHealth has languished as the worst performer in the six-member Standard & Poor's 500 Managed Health Care Index.

The options scandal forced UnitedHealth to adopt a new attitude, Hemsley told an investor conference Dec. 4.

`We Have Changed'

``We have changed in important, positive ways,'' Hemsley said.

At least 200 companies have disclosed internal or federal investigations of backdating, and 100 announced they must restate financial results, according to data compiled by Bloomberg. So far, the restatements, revisions and charges exceed $12.9 billion. More than 90 executives and directors left their jobs, and over 400 lawsuits were filed against more than 100 companies.

The lawsuit is In re: UnitedHealth Group Inc. Shareholder Derivative Lawsuit, NO. 06-cv-1216, U.S. District Court, District of Minnesota.

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