Court Denies UnitedHealth's Plea to Dismiss Backdating Suit

June 5, 2007 ( - A federal judge gave the go-ahead for a shareholder suit against UnitedHealth Group over allegations that the company inflated stock prices by failing to disclose backdated stock options awarded to former Chairman and Chief Executive William McGuire, the Associated Press reported.

In giving his blessing for the class action suit to move forward, U.S. District Judge James M. Rosenbaum wrote that the California Public Employee Retirement System (CalPERS)-led claim deserves a closer look. “If the plaintiffs are correct, this case is incredibly simple,” Rosenbaum wrote.

In his ruling, Rosenbaum compared CalPERS’ theory with the 1973 movie “The Sting,” in which con men played by Robert Redford and Paul Newman bet on horse races after the results were already known.

Rosenbaum also used poker-parallels, writing that if CalPERS’ claims have merit, then UnitedHealth executives would have been playing a rigged card game. “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,” he wrote.

Rosenbaum went on to say: “It is a poker axiom that if a player has his knees under the table and cannot tell who the sucker is, he’s it. In this game, according to plaintiffs, the patsy was either the hapless corporation … or the corporation’s shareholders, whose equity provided the game’s antes and bloated pot. That’s it. A claim has been stated.”

In May 2006, UnitedHealth announced it would have to restate its earnings by as much as $286 million after an internal investigation revealed a breakdown in controls related to stock options timing and the creation of a $1.6 billion option for McGuire (See  UnitedHealth Under Fire for Stock Options ).

McGuire was ousted in October (See   UnitedHealth’s McGuire To Depart over Stock Options Scandal)   following an the investigation that found eight cases where options were granted on the lowest price of the quarter, all of them before August 29, 2002, when Sarbanes-Oxley began requiring quicker disclosures of stock options grants. Though McGuire claimed he did not pick the dates for options given to executives and employees, documents and e-mails contradicted that claim.

The case is   California Public Employees Retirement System v. UnitedHealth Group, Inc. et al (0:06-cv-02939-JMR-FLN).