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William McGuire, former chief executive officer and chairman of the board of UnitedHealth Group, has agreed to return $468m (£235m; €325m) to the healthcare company he ran for about 15 years. With other payments, he is returning some $600m to the company.
The US Securities and Exchange Commission said that Dr McGuire and other employees had been granted stock options in UnitedHealth Group that were “backdated” to a day when the company’s stock was at a low price.
Stock options are usually granted at that day’s market price, so backdating them to a day when the company’s stock was low means that anyone exercising the option and selling the stock would be guaranteed a profit. Such transactions could affect a company’s reported earnings and its share price and might have tax consequences for the company and any individual exercising the options. The 2002 Sarbanes-Oxley Act made it illegal to backdate stock options and now requires companies to report stock options within two days of their being granted.
The Securities and Exchange Commission (SEC) alleged that, over 12 years, Dr McGuire “repeatedly caused the company to grant undisclosed, in-the-money [profitable] stock options to himself and other UnitedHealth officers and employees without recording in the company’s books and disclosing to shareholders material amounts of compensation expenses as required by applicable accounting rules.”
“Without admitting or denying the SEC’s charges,” says the commission’s press release, “McGuire agreed to a $468m settlement that includes a $7m civil penalty and reimbursement to the Minneapolis based healthcare company for all incentive- and equity-based compensation he received from 2003 through 2006.”
The commission’s chairman, Christopher Cox, said, “Whenever a corporate officer misleads investors about a company’s performance by secretly backdating stock options, the integrity of our markets is undermined. As demonstrated in this case, the commission is committed to holding corporate officers accountable for illegally backdating stock options and will seek the return of undeserved compensation.”
The commission said that Dr McGuire “knew, or was reckless in not knowing,” that annual reports filed to the commission contained “materially false and misleading statements concerning the true grant dates and proper exercise prices of stock options.”
In March 2007 UnitedHealth restated its financial statements for each year from 1994 to 2005 and disclosed material cumulative pretax errors in stock based compensation accounting that totalled $1.53bn for that period, the commission says.
“The $468m settlement in this case, including the largest penalty assessed against an individual in an options backdating case, reflects the magnitude and scope of Dr McGuire’s misconduct,” said Linda Chatman Thomsen, director of the commission’s enforcement division.
The commission said that Dr McGuire consented to various requirements as a result of the ruling, including a bar on his serving as an officer or director of a public company for 10 years.
At the time of going to press the BMJ was unable to confirm whether Dr McGuire still holds options worth about $800m, as reported by the New York Times (www.nytimes.com, 9 Dec 2007, “Sharper claws for recovering executive pay”). The commission said that the settlement with Dr McGuire was the first with an individual under the “clawback” provision of the Sarbanes-Oxley law, which deprives corporate executives of profits and bonuses “earned while their companies were misleading investors.” UnitedHealth Group is the parent company of United Healthcare, the second largest healthcare insurer in the United States, covering about 70 million people.
The commission’s investigation came after an article in the Wall Street Journal (www.wsj.com, 18 Mar 2006, “The perfect payday”) questioned whether companies, including UnitedHealth Group, had backdated stock options. The article won a Pulitzer Prize, the highest award in US journalism. The Internal Revenue Service (the US tax collecting agency), the Department of Justice, the Attorney’s Office for the Southern District of New York, and the Minnesota Attorney General’s office also began investigations as a result.
UnitedHealth Group appointed a law firm, Wilmer Cutler Pickering Hale and Dorr LLP, to conduct an independent review. Its report said that many stock options had been backdated, with adverse accounting consequences. It criticised the company for inadequate internal controls over the options granting process and lack of management transparency.
The report was released in October 2006, and Dr McGuire resigned in November 2006.