Review of UnitedHealth Group Prompts Shake-up at Top

Faced with an independent report that found widespread problems with the way UnitedHealth Group Inc. issued stock options, the nation’s second-largest health insurer said its chairman and CEO will leave the company.

The Minneapolis-based company said that chairman and CEO William McGuire will leave the board immediately and leave the company no later than Dec. 1. Board member William G. Spears will resign, and General Counsel David J. Lubben will retire.

UnitedHealth shares fell $1.40, or almost 3 percent, to $47.35 in early trading on the New York Stock Exchange.

The UnitedHealth shake-up adds to the list of corner-office victims of stock option backdating. So far, at least 30 senior executives or directors at 16 companies with stock option problems have resigned or been fired.

There may be many more to come: At least 135 companies have disclosed Securities and Exchange Commission, Department of Justice or internal investigations according to an Associated Press review.

This past week, McAfee Inc. and CNet Networks Inc. both announced their CEOs would resign, and McAfee also fired its president.

UnitedHealth named Stephen Hemsley, the company’s president and chief operating officer, as new CEO. Richard Burke, the founding CEO of UnitedHealth’s predecessor company, also was named chairman.

But while UnitedHealth’s board shakeup moved a lot of people into new positions, none of them are new faces. Hemsley has been McGuire’s heir apparent for several years. Burke founded the company and has been on its board since 1977.

That shows that UnitedHealth’s board is trying to appease prosecutors while avoiding scaring Wall Street by signaling a change in the company’s successful business model, said Peter Henning, a former lawyer in the enforcement division of the SEC who is now a law professor at Wayne State University in Michigan.

“They have to make sure that it looks to the regulators that they have done a thorough job and gotten all the miscreants out, but they have to maintain their credibility with Wall Street,” he said.

In one example after another, the report by a firm hired by the company’s board said McGuire’s huge awards of stock options got a boost in value because they were issued on one day but priced as if they’d been issued earlier, when the stock price was lower. The report said his option grants “were likely backdated.”

UnitedHealth said it had turned over the report by the law firm of Wilmer Cutler Pickering Hale and Dorr LLP to the Securities and Exchange Commission and the Justice Department.

UnitedHealth has disclosed that the IRS asked for documents dating back to 2003 concerning stock options and other compensation for some executives. It has also been subpoenaed by federal prosecutors.

McGuire, who had $1.6 billion in exercisable options at the end of 2005, is likely to remain under scrutiny, Henning said.

“Prosecutors are going to look pretty closely at Dr. McGuire. When you see dollar figures like over a billion dollars in unexercised options, that draws everyone’s attention,” he said.

McGuire became president and chief operating officer of what was then United Healthcare Corp. in 1989, and was named chairman and CEO in 1991. Through acquisitions he engineered UnitedHealth’s rise from a regional health insurer into one of the largest managed care companies in the country.

McGuire has pushed for more efficiency in the delivery of health care by measures such as putting patient information in a magnetic strip on the back of insurance cards, and encouraging customers to use the Internet instead of live phone operators for tasks such as switching doctors.

Shareholders loved it. Adjusted for splits, UnitedHealth shares rose from about 30 cents per share in 1990 to a peak of $62.14 in December. A $10,000 investment then would have been worth more than $2 million at its peak.

UnitedHealth’s board rewarded McGuire, granting him options to buy shares. As the stock price rose the value of those options swelled to $1.6 billion by the end of 2005.

Then in March, the Wall Street Journal reported that McGuire had received stock options on the days the company’s stock price hit yearly lows in 1997, 1999, and 2000, and that other options grants had occurred on low spots in the company’s share price. Statistically, that was nearly impossible unless the options were granted retroactively.

On Sunday, the company hired by UnitedHealth’s directors found that was probably the case.

The consultant looked at 29 options grants between 1994 and 2006. It found that most of those options grants didn’t show a written grant date or price until weeks or, in one case, nearly a month after the grant date.

The report also found that UnitedHealth’s options-granting policy for new hires “amounted to backdating in order to obtain a favorable strike price,” the price at which the option becomes profitable.

Backdating stock options isn’t always illegal, but failing to disclose it can trigger tax and regulatory problems. Indeed, on May 11, UnitedHealth acknowledged a “significant deficiency” in its handling of stock options and said it may have to restate as much as $286 million in earnings for 2003, 2004, and 2005.

Sorting out the accounting for the options mess already caused UnitedHealth to miss filing its audited second-quarter results with the SEC. On Sunday it said it would probably miss the deadline for filing its audited third-quarter results, too, although it will release its unaudited results on Thursday as planned.

UnitedHealth report: www.unitedhealthgroup.com/news/index_news.htm