Ex-CEO to make huge repayment
In the first settlement of its kind under post-Enron corporate reforms, the former head of insurance giant UnitedHealth Group Inc. agreed Thursday to pay $468 million to avoid trial on government charges that he secretly padded his paycheck by manipulating stock options.
Over 12 years, William McGuire, a University of Texas-trained physician, repeatedly had the company award him, company directors and employees stock options that had been backdated to increase their value, the government said.
McGuire did not acknowledge any wrongdoing but agreed to pay a $7-million civil penalty, as well as a reimbursement to Minnetonka, Minn.-based UnitedHealth for all incentive- and equity-based compensation he received from 2003 through 2006.
McGuire’s settlement with the Securities and Exchange Commission announced Thursday is the first for an individual under the so-called clawback provision of the Sarbanes-Oxley Act, which was adopted in the wake of the accounting scandal at Enron Corp.
Companies and federal regulators have been investigating backdating of corporate options since last year. More than 400 public companies have been sued, dozens of firms have restated financial results, and many corporate executives and directors have resigned.
Regulators vowed to continue enforcement actions under the clawback provision, which was included to deprive executives of their stock-sale profits and bonuses earned while their companies were misleading investors.
The settlement comes a year after McGuire, 59, stepped down under pressure as chairman and chief executive of UnitedHealth, one of the nation’s largest healthcare companies, which serves more than 71 million people.
Such deception undermines the markets, SEC Chairman Christopher Cox said Thursday, adding that the case demonstrated the government’s commitment to “holding corporate officers accountable for illegally backdating stock options” and to the return of “undeserved compensation.”
The settlement also bars McGuire from serving as an officer or director of a public company for 10 years.
In a statement issued by his lawyer, McGuire said he was pleased to have reached a resolution to the legal cloud hanging over him: “The last 18 months have been an extraordinarily challenging period for my family and me. I am extremely proud of all that our team accomplished at UnitedHealth Group to improve healthcare and build a highly successful and innovative company, and I wish the company well in fulfilling its mission.”
The settlement “is another important step toward resolving matters relating to our historical stock option practices and putting them behind us,” UnitedHealth spokesman Tyler Mason said.
UnitedHealth, which serves 2.5 million Californians through its Cypress-based PacifiCare unit, is among the biggest companies caught up in the options scandal that cast a shadow across the corporate landscape last year.
More than two dozen executives at companies across the country have quit or were fired amid probes over questionably timed options awarded to high-ranking corporate insiders.
Last December, McGuire left, along with two other UnitedHealth executives, after an investigation commissioned by the company’s board concluded that he had received stock option grants that were “likely backdated” to allow insiders to maximize financial gains.
The controversy was touched off by a Wall Street Journal report last year that questioned whether UnitedHealth and other companies had dated executives’ options -- after they were granted -- to when the shares dipped particularly low in order to maximize the recipients’ gains.
The newspaper reported that McGuire received options on the days UnitedHealth’s share price hit annual lows in 1997, 1999 and 2000 -- timing that was all but impossible by chance.
During McGuire’s 17-year tenure, UnitedHealth’s share price increased fiftyfold. At the same time, he amassed a potential fortune in unexercised stock options that became the focus of probes by U.S. and state regulators. His shares were valued at one point at $1.6 billion.
In the settlement, McGuire agreed to return over $320 million in options. He also is forgoing the full value of his fully vested Supplemental Executive Retirement Plan (SERP), which is worth nearly $92 million, and about $8.1 million of incentive compensation benefits in a deferred compensation plan, said his lawyer, David M. Brodsky.
McGuire already has repaid $198 million by re-pricing options, bringing his total giveback to more than $600 million.
In all, McGuire’s actions “remove any possible benefit he may have received” as a result of UnitedHealth’s options program, Brodsky said.
A special litigation committee designated by UnitedHealth’s board of directors recommended Thursday that a shareholder suit filed in the wake of the scandal be dismissed. The settlement is subject to the approval of the court supervising that lawsuit and company shareholders.
Amid government investigations that drew more than 100 companies into their cross hairs, corporate boards rushed to clean house before potential crackdowns by regulators or prosecutors. The legal and tax problems surrounding backdating involve inadequate disclosure.
The investigation by a law firm hired by UnitedHealth’s board found that 1.5 million options -- most of them granted to McGuire as a part of his 1999 compensation package -- were “likely backdated.” It also found that the UnitedHealth board’s compensation committee was kept in the dark about details such as the dating of options.
Another problem, it said, was that the board was not informed of the full extent of financial relationships between McGuire and William Spears, who headed the compensation committee at the time the CEO’s 1999 compensation package was put together.
General counsel David J. Lubben and Spears left the company along with McGuire last year.
Lubben has agreed to repay $20.6 million in prior stock option gains and turn in unexercised options valued by UnitedHealth at more than $3 million. The company said Lubben’s total givebacks would top $30 million
McGuire ascended to the helm of what was then a regional healthcare company in 1989.
Through a series of acquisitions, he turned UnitedHealth into a managed-care leader. Today the company serves more than 71 million people nationwide through traditional health plans, as well as Medicare and Medicaid programs and health-related financial products.
One of UnitedHealth’s latest acquisitions was the 2005 purchase of PacifiCare for $9.2 billion. The deal may have gone largely unnoticed by patients because the company kept the PacifiCare name in California
With the acquisition of PacifiCare’s Secure Horizons HMOs, UnitedHealth vastly expanded its slice of the rapidly growing Medicare market.
