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Judge Cites "The Sting" in Backdating Ruling

CalPers and other shareholders reportedly charged that UnitedHealth inflated the company's stock price by failing to disclose that it had backdated stock options.
Stephen Taub, CFO.com | US
June 5, 2007

Employing an analogy from the 1973 movie "The Sting," a federal judge ruled that shareholders can sue UnitedHealth Group concerning the company’s alleged backdating of stock options, according to the Associated Press.

The suit, led by the California Public Employees Retirement System (CalPERS), the large pension fund, alleges that UnitedHealth and former chairman and chief executive William McGuire inflated the company's stock price by failing to disclose that it had backdated stock options given to McGuire and other employees, according to the report.

In its bid to get the lawsuit dismissed, UnitedHealth argued that CalPERS showed neither that the health-care insurer improperly accounted for its options nor that its public statements mislead investors, according to the AP. But U.S. District Judge James M. Rosenbaum ruled that, regardless of whether or not illegal backdating occurred, the CalPERS reasoning has merit enough for the case to proceed.

The judge compared the shareholders' claim to confidence game in the "The Sting" in which con men bet on horse races after they have been run, according to the report. "The Court expresses not the slightest opinion as to whether such shenanigans occurred here, but such is the essence of plaintiffs' theory," Rosenbaum reportedly wrote.

"If plaintiffs are correct, this case is incredibly simple," the judge also opined, according to the wire service. Rosenbaum added that CalPERS claims that UnitedHealth and its executives "were playing a game with a stacked deck. When awarded options, with deliberately selected grant dates which were already in the money, defendants were playing a game they knew they could not lose; and, unsurprisingly, defendants won.”

In March, UnitedHealth said it would reduce its previously reported net earnings by more than $1.5 billion because of incorrect accounting for stock options.

The company announced last November that it had received "voluntary written agreement" from McGuire to have the exercise prices of his options with grant dates of between 1994 and 2002 reset to the highest share price during the recorded grant year for each particular option. For options suspended in 1999 and reinstituted in 2000, the exercise prices would be reset to the highest share price in 2000. McGuire left the company in December.




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