UnitedHealth Sued Again Over Option Dating Allegations

May 23, 2006 (PLANSPONSOR.com) - UnitedHealth Group has been hit with another shareholder lawsuit - this time filed by two pension funds - over allegations of stock option grant backdating.

A news release from the Grant & Eisenhofer law firm said the Public Employees Retirement System of Ohio and the Teachers’ Retirement System of Ohio filed the suit against United in US District Court for the District of Minnesota.  The two funds hold over five million shares of UnitedHealth stock.  

The pension funds’ suit charged that CEO William McGuire was allowed to “dictate his own compensation through the secret manipulation of the company’s stock option plans” for nearly a decade.  In addition to McGuire, defendants named in the suit include current and former UGH board members, among them former U.S. Vice President Walter Mondale, former New Jersey Governor Thomas Kean, and former U.S. Secretary of Health and Human Services Donna Shalala, as well as current UGH president and chief operating officer Stephen Hemsley.

“Defy Statistical Probability”

Grant & Eisenhofer said a Wall Street Journal analysis published in March showed that the company’s recurring options grants to Dr. McGuire and other executives over the years were so consistently timed on the cusp of sharp run-ups in share value as to defy statistical probability.  The firm recently announced that it was restating $286 million in net income for the past three years as a result of the “significant deficiency” in its reporting of the options to financial regulators (see  UnitedHealth Under Fire for Stock Options ).   Both the Justice Department and the Internal Revenue Service are now investigating the company, along with a formal inquiry underway by the Securities and Exchange Commission (see  Six Companies Feel Heat From NY US Attorney’s Office Over Stock Options Timing ).  Grant & Eisenhofer says that since the Journal’s initial report of the company’s option timing published on March 18, UGH has lost more than $16 billion in market capitalization.  The firm has already drawn another suit by other pension funds (see  Public Pension Funds Sue UnitedHealth over Stock Option Grants ). 

The Ohio pension funds suit alleges that UnitedHealth’s improper option practices go back at least to 1996, when UHG’s board allowed Dr. McGuire to effectively set the strike price for options granted to senior executives.   “Dr. McGuire was able to achieve a windfall for himself and his fellow executive(s)…by retroactively selecting the date on which options were granted,” the complaint states.   “Dr. McGuire simply picked grant dates on which the share price closed at a relative low point and/or right before a dramatic increase in share price.”   The company formalized this arrangement in its 1999 employment contract with Dr. McGuire, specifically delegating to its CEO the authority to determine option grant dates for UGH employees.

According to the Grant & Eisehofer press release, the suit charges that in rubberstamping and then concealing Dr. McGuire’s control of the option grant dates, UHG’s directors “completely abdicated their fiduciary responsibilities” to shareholders, leading the company to vastly overstate its earnings and issue false and misleading financial statements since at least 1997.  

In relief, the funds are asking that the company disgorge all profits gained as a result of the alleged option dating manipulation scheme while also canceling or rescinding all outstanding options not yet exercised for which there is proof of backdating or manipulation of the grant dates.

The investors are also seeking compensatory and punitive damages against the firm for the various violations of fiduciary duty.