Faces Pressure to Leave At UnitedHealth
Investigation Finds Evidence Options Were Backdated; Board
Plans to Meet Sunday
By James Bandler and Charles Forelle
Saturday, October 14, 2006
William McGuire, chairman and chief executive of UnitedHealth
Group Inc., faces mounting boardroom pressure to leave the giant
health insurer after an internal probe found evidence that stock
options were improperly backdated to benefit insiders, people
familiar with the matter said.
Dr. McGuire's fate, along with that of general counsel David
Lubben, could be decided at a board meeting scheduled to take
place Sunday, these people said.
Directors received a detailed briefing on the results of the
months-long internal probe Friday in Washington. The probe was
conducted by law firm WilmerHale. The meeting included a
lengthy presentation by Dr. McGuire and his attorney.
UnitedHealth, one of the nation's largest health insurers with a
market value of $66 billion, is among the most prominent of the
more than 100 companies caught up in the stock-options scandal.
Dr. McGuire has been among the highest-paid executives in U.S.
corporate history, amassing an enormous, options-based fortune
over his 15 years running UnitedHealth. At the end of 2005, his
unexercised cache of options was valued at $1.78 billion, far
and away the largest sum held by any U.S. executive, according
to Standard & Poor's ExecuComp.
Also at risk are several directors on UnitedHealth's 12-member
board who served on its compensation committee during the period
when the improperly dated grants were awarded, the people
familiar with the situation said. Some past
compensation-committee members include former New Jersey Gov.
Thomas H. Kean, New York money-manager William Spears and
Columbia University nursing-school dean Mary Mundinger. None of
the directors could be reached for comment.
As of Friday, people close to the situation said, many board
members had decided Dr. McGuire would have to depart. But they
cautioned that the situation is fluid, and directors are
wrestling with a difficult and complex decision.
Another person close to the situation said Dr. McGuire has
insisted that he always believed the grant dates were picked
based upon an actual meeting, either in person or over the
phone, even though the compensation committee didn't formally
approve the grants until after the grant's stated date. This
person added that there were problems with the record-keeping to
document grants at UnitedHealth, and that parties involved had
"faint recollections" about what happened.
At the same time, while Dr. McGuire is a highly regarded leader
of the company, directors know that executives, and possibly
UnitedHealth itself, face the prospect of civil action from the
Securities and Exchange Commission in the options matter. The
matter also is being probed by federal prosecutors in Manhattan
and by Minnesota's attorney general.
At issue in the UnitedHealth case and others are questions about
whether stock options were improperly backdated. Options are
designed to give recipients the opportunity to profit if the
company's share price rises in the future. Grants typically are
structured so that the recipient can buy shares later at the
stock's market price on the day the option was granted, called
the exercise price. Backdating involves pretending that the
grant was awarded on an earlier day, when the share price was
particularly low, giving the recipient a chance at extra profit.
A spokeswoman for UnitedHealth declined comment.
During his tenure at the helm of UnitedHealth, Dr. McGuire has
year after year received giant grants of options. In many of
those years, the purported dates were suspiciously fortunate.
Between 1994 and 2002, he received 12 grants, each dated just
before a sharp rise in the company's share price. Three grants
-- in 1997, 1999 and 2000 -- were dated on the day of the
stock's lowest closing price of the year.
A Wall Street Journal analysis published in March found that the
odds of such a fortunate pattern of dates occurring if the dates
were chosen at random were infinitesimal -- less than one in 200
million. The company said at the time that its granting process
was "appropriate," but the article spurred the internal
investigation as well as probes by authorities.
Until recently, some people familiar with the matter said, Dr.
McGuire's chances of surviving the options investigation seemed
fairly high. These people said the options problems -- which
the company had previously indicated would likely cause it to
restate financial results -- appeared confined to sloppy
bookkeeping. But the WilmerHale probe concluded that the issues
ran deeper and included backdating of option grants, said people
familiar with its findings.
A spokeswoman for WilmerHale declined comment.
The climate surrounding backdating has darkened in recent days.
This past week, 10 corporate officials, including four CEOs,
left their posts amid options problems at their companies.
Earlier this month, Apple Computer Inc. said Fred Anderson, a
director who was a former finance chief at the company, had
resigned from its board following a probe that identified 15
instances of backdating. Apple said its iconic CEO, Steve Jobs,
knew about backdating at the company, but wasn't aware of its
Dr. McGuire, a Texas native and a pulmonologist by training,
quit clinical practice in the 1980s to stake his claim in the
bustling business of health insurance. His employer was bought
by UnitedHealth, and Dr. McGuire arrived in Minnesota and
established himself as a star. By 1991, he was CEO.
By many measures, Dr. McGuire holds a place among the most
successful corporate executives of the modern era. UnitedHealth
shares have risen about 50-fold during his tenure.
The massive grants of stock options, meanwhile, have yielded him
hundreds of millions of dollars in profit, the cornerstone of a
large fortune. He hasn't been the only beneficiary; No. 2 on
the Standard & Poor's ExecuComp list of executives with the
greatest value in options was Stephen Hemsley, Dr. McGuire's top
lieutenant at UnitedHealth, who had a fortune of somewhat less
than half of Dr. McGuire's stake.
Dr. McGuire benefited handsomely from the munificence of the
UnitedHealth board's compensation committee, which -- in
addition to the options -- granted him generous salaries and
bonuses and a hefty retirement deal. "We're so lucky to have
Bill," Ms. Mundinger, a longtime compensation-committee member,
told the Journal earlier this year. Of his rising pay, she
said: "He needs to be compensated appropriately so that his
business model has believability in the market."
The largest grant Dr. McGuire received came in 1999, entitling
him to purchase 1.825 million shares of the company's stock.
Adjusted for several splits that have occurred since then, it is
equivalent to 14.6 million shares. He so far has exercised only
about 5% of the options, and his profit on the shares remaining
would be about $600 million if cashed in today.
But the grant's timing, in October of that year, raises
eyebrows: It was dated at the stock's lowest point all year.
In March, Mr. Spears, the UnitedHealth director, told the
Journal that the 1999 grant wasn't backdated to that propitious
time. Rather, he said, the low price encouraged directors and
Dr. McGuire to wrap up negotiations over a new employment
What would happen to Dr. McGuire's outstanding grants should he
have to depart isn't clear. In April, with questions swirling
about backdating, Dr. McGuire said he and other senior
executives would no longer take options.
James Bandler at
email@example.com and Charles Forelle at