UnitedHealth's McGuire To Depart over Stock Options Scandal

October 16, 2006 (PLANSPONSOR.com) - UnitedHealth announced Sunday its chief executive would step down after a report from an internal probe into the company's stock option practices revealed that Chairman and CEO William McGuire's stock options saw a boost in value because they were "likely backdated."

According to the Wall Street Journal, the report from the firm investigating the company’s options suggests McGuire misled investigators, implying the choice of grant dates coincided with favorable prices by coincidence. The improbability of that claim led the company’s board to decide McGuire should leave, the WSJ said.

Additionally, it was announced that William Spears, a member of the board’s compensation committee, and David Lubben, the company’s general counsel, would leave.

The Journal reported in March that McGuire had received stock options on the days the company’s stock price hit yearly lows, and that other options grants had occurred on low spots in the company’s share price. After looking at 29 options grants between 1994 and 2006, the firm investigating UnitedHealth confirmed that was the case.

The investigation 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 executive and employees, documents and emails contradicted that claim. The report says McGuire was “central to the options process,” according to the WSJ.

The report also revealed UnitedHealth’s options-granting policy for new hires “amounted to backdating in order to obtain a favorable strike price,” finding that between 2000 and 2002, the company awarded new employees shares that were sometimes priced as if they were granted before the hire date. The report said UnitedHealth used tactics such as finding the lowest price between the time the new hire was first contacted or offered the job, and the end of the quarter.

With the declaration of McGuire’s resignation, the nation’s second largest managed care company lifted its Chief Operating Officer Stephen Hemsley to the rank of CEO, and Richard Burke, the founding CEO of UnitedHealth’s predecessor company, to chairman, the Wall Street Journal reported. However, the company said that McGuire would continue as CEO until he leaves, no later than December 1.

UnitedHealth’s probe into its own stock option practices dates as a far back as May, when it admitted an internal investigation unearthed a “significant deficiency” in its controls relating to stock option plan administration, and accounting for and disclosure of stock option grants (See UnitedHealth Under Fire for Stock Options ), namely its creation of a $1.6 billion option for McGuire.The company also announced in May it would restate its earnings by as much as $286 million.

McGuire’s resignation brings the number of fallen executives in connection with the stock options scandal to 30, according to the Journal, with the most recent being McAfee Inc.’s (See McAfee Hit with Options Scandal Upheaval) announcement that its chairman and CEO would retire.