By settling its civil stock-option backdating case, UnitedHealth Group Inc. — and also its former general counsel — has wrapped up one of the biggest and earliest of the Securities and Exchange Commission actions in what became one of the biggest business scandals of 2006.
UnitedHealth agreed to settle charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws. The commission had alleged that between 1994 and 2005 UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.
In a separate complaint, former general counsel David J. Lubben, also without admitting or denying the allegations, consented to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar.
According to the UnitedHealth complaint, certain company officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date, according to the regulator.
The backdated grants resulted in the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion, according to the SEC. It said that it declined to charge the company with fraud or seek a monetary penalty, based on the company’s “extraordinary cooperation” in the SEC investigation, along with “extensive remedial measures.”
UnitedHealth’s cooperation included an independent internal investigation, the company’s release in a regulatory filing of a report detailing the investigation’s findings and conclusions, and the sharing of the facts uncovered in the internal investigation with the government. The SEC said the company’s remedial actions included implementation of controls designed to prevent recurrence of fraudulent conduct, removal of certain senior executives and board members, and recoupment of nearly $1.8 billion in cash, options value, and other benefits from several former and current officers, through, among other things, derivative litigation and the voluntary re-pricing and cancellation of retroactively-priced options.
In the second complaint the SEC charged Lubben with participating in the stock option backdating scheme. The complaint said that Lubben or others acting at his direction created false or misleading company records indicating that the grants had occurred on dates when the company’s stock price had been at a low. Lubben personally received numerous backdated grants of options, representing as many as 3.8 million shares of UnitedHealth stock on a split adjusted basis, the complaint said, and he exercised approximately 1.8 million of those options for approximately $1.1 million in gains attributable to improper backdating.
With Lubben’s consent to the charged, he agreed to disgorge gains of $1.4 million, with $347,211 in prejudgment interest and pay a $575,000 civil penalty. In addition, Lubben agreed to resolve a separate administrative proceeding against him by consenting to a Commission order that suspends him from appearing or practicing before the Commission as an attorney for three years.
In December 2007 the SEC announced a record $468-million settled enforcement action against Dr. William W. McGuire, former UnitedHealth CEO and chairman. That settlement, pending before U.S. District Judge James M. Rosenbaum, was the first with an individual to deprive corporate executives of stock-sale profits and bonuses earned while their companies were misleading investors, under the “clawback” provision (Section 304) of the Sarbanes-Oxley Act.
Dr. McGuire consented to antifraud and other injunctions; disgorgement plus prejudgment interest of approximately $12.7 million; a $7 million civil penalty — the largest penalty against an individual in a stock option backdating case — and reimbursement to UnitedHealth under Section 304 of about $448 million in cash bonuses, profits from the exercise and sale of UnitedHealth stock and unexercised UnitedHealth options. He also agreed to be barred from serving as an officer or director of a public company for 10 years.