US: Former Chief Will Forfeit $418 Million

In one of the largest
corporate pay give-backs ever, William W. McGuire, the former chief
executive of UnitedHealth Group, has agreed to forfeit at least $418
million to settle claims related to back-dated stock

The payback is on top of roughly $198 million that Mr. McGuire, an
entrepreneur who built UnitedHealth, had previously agreed to return
to his former employer.

The total - $618 million - includes money that Mr. McGuire will
return as part of separate settlements reached yesterday with the
Securities and Exchange Commission and UnitedHealth shareholders. The
forfeitures are the first time regulators have successfully employed
corporate governance rules put in place after the collapse of Enron
that force executives to disgorge ill-gotten gains.

As part of the settlement with the S.E.C., Mr. McGuire will pay a $7
million fine and will be barred from serving as a director of a public
company for 10 years. He will, however, be allowed to keep stock
options valued at more than $800 million, including many that have
been sharply criticized.

The developments are the most significant to date since federal
regulators started looking into the backdating of stock options. More
than 120 companies have come under scrutiny for granting options to
executives on dates when the company's share price was low, a tactic
that guaranteed the maximum profit when the options were

The settlement comes a year after the furor over compensation forced
Mr. McGuire's resignation from UnitedHealth, the nation's largest
health insurer.

In a statement yesterday, Mr. McGuire said that he was pleased to put
the controversy behind him.

"The last 18 months have been an extraordinarily challenging period
for my family, and I am pleased to have reached a resolution," he

UnitedHealth remains embroiled in the scandal over improperly granted
options. The S.E.C. said its inquiry at UnitedHealth is continuing. So
far, the company has restated its earnings by $1.5 billion and
announced a $55 million settlement with the Internal Revenue

S.E.C. officials, as a matter of policy, declined to comment whether
any specific executives or directors were under scrutiny. In October
2006, UnitedHealth's top lawyer, David J. Lubben, and a former
director, William G. Spears, abruptly resigned.

In August 2006, the company board appointed a special litigation
committee to review claims brought against the company related to
improper backdating.

Yesterday, this committee concluded that all claims against current
and former officials should be dropped. The committee reached
settlements with Mr. Lubben, who will give back about $30 million and
Mr. Spears, who agreed to arbitration.

UnitedHealth has maintained its support of its current chief, Stephen
Hemsley, even though he voluntarily agreed to give back or reprice
millions of improperly dated options, at a cost of nearly $240

Most companies implicated in backdating controversies so far are
Silicon Valley start-ups or firms with technology roots, where options
with favorable dates were considered a recruitment tool. UnitedHealth,
which has a market capitalization of $66 billion, is one of the few
blue-chip companies to face the issue, and its problems underscore how
prevalent the practice has been.

UnitedHealth has gone through operating strains since Mr. McGuire
left, as it tried to integrate several large acquisitions, including
Oxford Health Plans, and took on the largest number of enrollees in
the new Medicare Part D drug plan while cutting costs. Shareholder
advocates cheered the decision and the use of the S.E.C.'s
willingness to claw back ill-gotten stock sales and bonuses. "I
think this is terrific," said John A. Hill, chairman of the trustees
at Putnam Funds, the mutual fund giant.

"I think it sets the standard for similar events that may occur in
the future," said Mr. Hill, who is a critic of what he regards as
excessive executive pay.

Chad Johnson, a partner at Bernstein Litowitz Berger & Grossmann,
a law firm that represented six of the nine public pension funds that
sued UnitedHealth Group and 20 executives and directors, said: "This
result significantly raises the bar on corporate accountability. It
sends a message to top-level executives that you can't take money
from the company and shareholders and not expect to be held
accountable by institutional investors."

The roughly $900 million to be repaid by the executives is remarkable
on several counts. First, the figure exceeds the profits generated by
the executives as a result of the backdating schemes, Mr. Johnson
said. In addition, the recovery in the case is far greater than
amounts received in other settlements reached with companies in the
recent past.

Individuals sued in cases related to the Enron failure, for example,
paid $13 million. And the backdating case involving Mercury
Interactive generated $117 million in recoveries.

Shareholders sued UnitedHealth and the 20 executives and directors in
the spring of 2006, after the company's options granting practices
were questioned in an article in The Wall Street Journal. The lawyers
for the nine state pension funds conducted an investigation and later
filed suit.

The shareholder action got a big lift in March 2007 when James M.
Rosenbaum, the federal judge overseeing the case in Minnesota, refused
to grant the defendants' motion to dismiss the case and allowed
discovery to proceed. That allowed lawyers for the pension funds to
review internal documents.

Mr. Johnson said the special litigation committee formed by the
UnitedHealth directors was more aggressive than similar committees
convened at other troubled companies because it carefully weighed the
input of investors.

Milt Freudenheim and
Gretchen Morgenson contributed reporting.
AMP Section Name:Regulation
  • 186 Financial Services, Insurance and Banking
  • 201 Executive Compensation

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