Risk & Compliance

UnitedHealth Settles Backdating Suit

It will pay $895 million to resolve all claims, and also settles ERISA-related litigation.
Stephen TaubJuly 2, 2008

UnitedHealth Group will pay $895 million to settle a class action lawsuit challenging its historical stock options practices. The company said the proposed deal fully resolves claims against it, against all current officers and directors named in the lawsuit, and certain former officers and directors.

The settlement was reached with lead plaintiff California Public Employees’ Retirement System (CalPERS) and plaintiff-class representative Alaska Plumbing and Pipefitting Industry Pension Trust, stemming from a consolidated amended complaint filed in December 2006 against UnitedHealth and some current and former officers and directors. Neither the company nor any individuals admitted to any wrongdoing in the proposed settlement agreement. Under the settlement, the company will make additional changes to its corporate governance policies and practices.

“This is a significant agreement that resolves a major issue before our company in a way that is in the best interests of our shareholders and other stakeholders,” said Thomas L. Strickland, chief legal officer of UnitedHealth Group. “The settlement provides UnitedHealth Group with certainty and closure on this lawsuit, avoids potentially costly and protracted litigation and allows us to continue to focus on providing Americans with high-quality, affordable health care solutions.”

Separately, UnitedHealth reached an agreement in principle to resolve the Employee Retirement Income Security Act (ERISA) class action litigation relating to the company’s historical stock options practices that was originally filed June 2006, in the U.S. District Court in Minnesota against the company and certain current and former officers and directors.

Under proposed settlement terms, UnitedHealth Group will pay $17 million into a settlement fund for the benefit of class members, most of which will be paid by the company’s insurance carriers. The proposed settlement, which is subject to the completion of final documentation and preliminary and final court approval, will fully resolve all claims against the company and all of the individual defendants in the ERISA class action litigation. Neither the company nor any of the individuals admit any wrongdoing as part of the proposed settlement agreement.

In other news, UnitedHealth slashed its 2008 earnings outlook after assessing preliminary second-quarter results, projecting adjusted earnings per share of $2.95 to $3.05, down from the $3.55 to $3.60 previously forecast. “During the second quarter, our risk-based businesses produced a lower level of gross margin than expected, and we also experienced a continuation of the pressures we saw in the first quarter,” CEO Stephen J. Hemsley said.

In March 2007, UnitedHealth Group had said it would reduce previously reported net earnings by more than $1.5 billion due to incorrect accounting for stock options. In December 2006, it estimated the total charges at between $1.5 billion and $1.7 billion for the period 1994 through 2005. It also disclosed that the SEC had launched a formal investigation into its stock-option practices.

In November of 2006, Patrick Erlandson resigned as CFO as part of sweeping compensation and governance changes. Last December, former CEO William McGuire agreed to pay a whopping $600 million to settle claims with federal regulators and his former employer over the company’s illegal backdating of stock options.

Under Section 304 of the Sarbanes-Oxley Act — the “clawback” provision — McGuire was to reimburse UnitedHealth for all incentive- and equity-based compensation he received from 2003 through 2006, totaling about $448 million in cash bonuses, profits from the exercise and sale of UnitedHealth stock, and unexercised options. He also agreed to disgorge nearly $11 million in illegally received gains pay about $1.7 million in prejudgment interest, and pay a $7 million civil penalty.

Under a separate settlement, McGuire agreed to surrender to his former employer options to acquire more than nine million shares of company stock, valued at about $320 million; his interest in the company’s Supplemental Executive Retirement Plan, valued at approximately $91 million; about $8 million in his Executive Savings Plan Account; and claims to other post-employment benefits. These amounts, combined with a previous repricing of all stock options awarded to McGuire from 1994 to 2002, mean the value to be relinquished by McGuire will be more than $600 million, according to the company.

The Securities and Exchange Commission announced that under its settlement with McGuire, his disgorgement plus prejudgment interest and his Section 304 reimbursement would be deemed satisfied by his $600 million payment to UnitedHealth.

Understanding Which ERP Modules Your Business Needs – And When