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US: Former Chief Will Forfeit $418 Million

by Eric DashNew York Times
December 7th, 2007

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 options.

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 exercised.

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 said.

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 Service.

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 million.

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.




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