Risk Management

Early Thaw Sought for Frozen Options

UnitedHealth's ex-CEO appeals a court ruling freezing $800 million in options pending the results of a lawsuit against him.
Stephen TaubJanuary 9, 2008

The former CEO of UnitedHealth Group wants some of his stock options that had been frozen by a court order now that he has agreed to a settlement with his ex-employer.

William McGuire is appealing the late December ruling by U.S. District Judge James Rosenbaum that about $800 million worth of his options remain frozen, according to the Associated Press.

McGuire had amassed about $874 million in options over a 15-year period.

In his December settlement with UnitedHealth, he agreed to surrender options to acquire more than nine million shares of company stock, valued at about $320 million. He also agreed to relinquish his interest in the company’s supplemental executive retirement pan, valued at approximately $91 million; about $8 million in his executive savings plan account; and claims to other post-employment benefits.

The judge refused to lift the injunction because that could make it harder for the California Public Employees’ Retirement System (CalPERS) — the plaintiff in a separate lawsuit against McGuire — to collect a judgment, according to the Minneapolis Star Tribune.

Under a concurrent settlement with the SEC in December, McGuire agreed to disgorge nearly $11 million in illegal gains, pay about $1.7 million in prejudgment interest, and pay a $7 million civil penalty.

Altogether, McGuire has agreed to relinquish more than $600 million, including the above amounts and a previous repricing of all stock options awarded to him from 1994 to 2002.

McGuire resigned from the health insurer in October 2006 after an internal report found that options awarded to him and others likely were backdated; CFO Patrick Erlandson resigned a month later.

The SEC’s complaint alleged that during a 12-year period, McGuire repeatedly caused the company to grant undisclosed, in-the-money stock options to himself and other UnitedHealth officers and employees without recording them in the company’s books or disclosing them to shareholders.

The SEC also alleged that from at least 1994 through 2005, McGuire looked back over a window of time and picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the company’s common stock, resulting in grants of in-the-money options. According to the complaint, McGuire signed and approved backdated documents falsely indicating that the options had actually been granted on these earlier dates when UnitedHealth’s stock price was at or near the low points.

According to the SEC complaint, these inaccurate documents caused the company to understate compensation expenses for stock options, and were routinely provided to the company’s external auditors in connection with their audits and reviews of UnitedHealth’s financial statements.

In March 2007, UnitedHealth restated its financial statements for each year from 1994 through 2005, and disclosed material cumulative pre-tax errors in stock-based compensation accounting that totaled $1.526 billion for that period.

The SEC further alleged that from 1994 through 2005, McGuire personally received more than 44 million split-adjusted UnitedHealth options, most or all of which were backdated.