UnitedHealth's former CEO to repay $600M
UnitedHealth Group Inc.'s former Chief Executive Officer William W. McGuire agreed to give back more than $600 million in benefits, mostly stock options that investors claimed in a lawsuit were illegally backdated.
Other past and present officers have relinquished about $300 million, UnitedHealth said Thursday in a statement announcing settlement of the lawsuit. Attorneys for pension funds in Ohio and other states that filed the suit said CEO Stephen J. Hemsley is paying $240 million, although the company said he isn't doing so as part of the settlement.
UnitedHealth, the largest U.S. insurer, is among at least 200 companies that have disclosed internal or federal probes of backdating, the practice of setting dates for stock options to magnify their value. McGuire was forced to resign as chairman and CEO of UnitedHealth in October 2006 after an independent law firm found evidence he participated in backdating. At one point, his vested shares were valued at $1.6 billion.
"The recovery of more than $920 million is an extraordinary event," said plaintiffs' attorney Chad Johnson in an e-mailed statement. "This result sends a clear message to corporate executives everywhere -- that if you abuse your position for personal gain at the expense of the shareholders, you will be held accountable by institutional investors."
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.
McGuire agreed to pay a $7 million fine in an agreement yesterday with the U.S. Securities and Exchange Commission, the largest levied by the regulatory agency so far for options backdating. McGuire didn't admit or deny wrongdoing under the SEC settlement.
"Whenever a corporate officer misleads investors about a company's performance by secretly backdating stock options, the integrity of our markets is undermined," SEC Chairman Christopher Cox said in a statement.
McGuire is the first person to be sanctioned by the SEC under the Sarbanes-Oxley Act's so-called clawback provision, requiring executives to return bonuses and stock-sale profits paid while a company misstates earnings. Congress passed the law in 2002 to combat corporate fraud after Enron Corp.'s collapse.
The lawsuit filed by the state pension funds 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 said that the settlements of the derivative suit and the SEC action end major legal actions against him.
"The last 18 months have been extraordinarily challenging period for my family and me," he said in an e-mailed statement. "I am very pleased to have reached a resolution that puts these matters to rest."
UnitedHealth challenged the assertion made by plaintiffs' attorneys in a statement that Hemsley "will repay" $240 million as part of the suit's settlement. Hemsley relinquished most of those benefits a year ago, said UnitedHealth spokesman Don Nathan in a telephone interview. Settlement documents filed in court in Minnesota described Hemsley among "non-settling defendants."
After McGuire was forced out, UnitedHealth 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.
Chief Judge James Rosenbaum of the U.S. District Court in Minnesota in March granted the defendants' motion to delay pursuit of the pension funds' lawsuit, while a special litigation committee investigated allegations raised by the shareholders.
The committee, made up of two former Minnesota Supreme Court justices, recommended approval of the settlement.
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. UnitedHealth rose $1.30, or 2.4 percent, to $55.98 at 4:33 p.m. in New York Stock Exchange composite trading, before the settlement announcement.
UnitedHealth has adopted a new attitude, Hemsley told an investor conference Dec. 4.
"We have changed in important, positive ways," he said.
UnitedHealth's former general counsel David Lubben will pay about $30 million, including $20.6 million gained through the March 2007 exercise of stock options, the company said.
William Spears, former head of the company board's compensation committee, has agreed to settle. The amount will be determined by binding arbitration, the company said.
Spears' attorney Carl Loewenson Jr. and Lubben's lawyer Seth Levine didn't immediately return calls for comment.
Of at least 200 companies that have disclosed investigations of backdating, 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.
