NEW YORK (Reuters) - The former chief executive of UnitedHealth Group Inc (UNH.N) will forfeit more than $400 million in stock options and other compensation and pay a $7 million fine to settle an investigation into the health insurer’s options practices.
Former CEO William McGuire settled claims with both the U.S. Securities and Exchange Commission and the company, which had a special committee investigate shareholder claims arising from options pay to top company executives.
The company, the largest U.S. health insurer by market value, also settled with its former general counsel David Lubben and former director William Spears.
McGuire did not admit or deny the SEC’s charges. Under the SEC settlement, he will be barred from serving as an officer or director of a public company for 10 years.
“The last 18 months have been an extraordinarily challenging period for my family and me,” McGuire said in a statement. “I am very pleased to have reached a resolution that puts these matters to rest.”
Chad Johnson, counsel to many of the public pension funds that were plaintiffs in the case, said, “The message is clear: those imperial corporate executives who dare to use their positions of trust to take money from the company and its shareholders will be held personally accountable.”
The SEC said the settlement is the first to use the “clawback” provision of the Sarbanes-Oxley corporate reform law to deprive a corporate executive of stock sale profits and bonuses earned while a company was misleading investors.
McGuire, who served as chief executive for 15 years and left United Healthcare last year after an independent counsel found evidence of backdating options, had accumulated more than $1.6 billion in stock options by the end of 2005. Following UnitedHealth’s internal report, McGuire had agreed to reprice some of those options, reducing their value.
Including that repricing, McGuire will have given up more than $600 million, the company said.
“Is this the pound of flesh?” asked Sheryl Skolnick, an analyst at CRT Capital who follows United Healthcare. “There will be those who will argue that it’s somehow not enough... but it’s a significant portion to surrender,” she said.
Lawyers representing shareholders in similar actions greeted the settlement with approval.
Mark Molumphy, lead counsel of a shareholder derivative action against Apple Inc (AAPL.O), said, ”The important fact is that the people who got the grants are now being forced to give that money back, which to date really hasn’t been the case.
“We think that is the way these cases should be resolved. Frankly, the Apple case should have been resolved months ago,” he said.
The SEC complaint alleged that from at least 1994 through 2005, McGuire picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the stock, resulting in grants of in-the-money options.
McGuire approved backdated documents that falsely indicated the options had actually been granted on these earlier dates, the SEC said. These documents caused the company to understate compensation expenses for stock options, the SEC said.
“Whenever a corporate officer misleads investors about a company’s performance by secretly backdating stock options, the integrity of our markets is undermined,” SEC Chairman Christopher Cox said.
The company’s committee estimated that current and former executives would surrender a total of about $900 million, including the value previously relinquished through options repricing. It recommended that all claims in the derivative suits be dismissed.
Shares of UnitedHealth, which were around $62 before the backdating revelations began in early 2006 and then fell as low as about $41, closed on Thursday at $55.98 on the New York Stock Exchange.
Reporting by Martha Graybow, Lewis Krauskopf, Bill Berkrot and Edward Tobin, and Lisa Baertlein and Gina Keating in Los Angeles; Editing by Gary Hill, Leslie Gevirtz