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Stock scandal topples CEO of UnitedHealth

His lucrative options grants "were likely backdated," a report says.

By ASSOCIATED PRESS
Published October 16, 2006

MINNEAPOLIS - The stock options scandal claimed its biggest corporate chief yet on Sunday, with UnitedHealth Group Inc. saying chairman and CEO William McGuire would step down because an outside report found that his option grants "were likely backdated."

UnitedHealth, the nation's second-largest managed care company, named its president and chief operating officer Stephen Hemsley to be the new CEO. It installed Richard Burke, the founding CEO of UnitedHealth's predecessor company, as chairman.

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 had been issued earlier, when the stock price was lower.

That prompted UnitedHealth's board to announce sweeping changes on Sunday. McGuire will step down immediately as chairman and as a director. The company said that McGuire would continue as CEO until he leaves, no later than Dec. 1, and that he would "assist in an orderly transition to new leadership." The company said board member William G. Spears was resigning, and that general counsel David J. Lubben would retire.

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

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. 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.

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 firm hired by UnitedHealth's directors found that was probably the case.

Backdating stock options isn't always illegal, but failing to disclose it can trigger tax and regulatory problems.

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

In an interview in April, McGuire said his options fortune didn't come at the expense of the people who pay for health insurance. "This isn't a giveaway of money that occurs out of the premiums of health care recipients. These are shareholder dollars," he said at the time.

[Last modified October 16, 2006, 05:18:00]