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UnitedHealth Prepares For Backdate Stock Option Suits

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UnitedHealth Group Inc. is preparing to face a flurry of litigation in the wake of a review team report suggesting that the company probably did backdate stock option grants.

The Minnetonka, Minn., managed care giant generated $1.1 billion in net income in the third quarter on $18 billion in revenue, in part by helping to provide health care for 28 million U.S. residents, up from 23 million residents in the third quarter of 2005.

But, since the review team has released its report, UnitedHealth has announced several executive changes, including the immediate resignation of Dr. William McGuire from his post as chairman and his seat on the company’s board.

Moody’s Investors Service, New York, has cut the rating it has assigned to UnitedHealth’s long-term debt to ‘A3,’ from ‘A2,’ and UnitedHealth says it has lined up a $7.5 billion revolving credit facility because of the possibility that it might need additional liquidity if recent events lead to litigation relating to the company’s debt securities.

The UnitedHealth board hired lawyers from Wilmer Cutler Pickering Hale and Dorr L.L.P., Boston, in April to follow up on press reports suggesting that the company had inflated executive compensation by backdating stock option grants.

The measurement dates used by the company for many option grants issued to key officers and other employees under review “were incorrect, and many of the option grants were likely backdated,” the review team concludes in its report.

McGuire, who was both the company’s chairman and chief executive officer during the period under review, told the review team that grant dates were selected without the benefit of hindsight and said records of communications involving him and members of the compensation committee support the stock option grant dates.

Statistical analysis shows that the “option grant dates generally corresponded to prices at or near the lowest price for the quarter or year,” and the company lacked the necessary systems to give complete option grant information to the accounting, legal or human resources departments, or to provide adequate minutes of meetings dealing with stock option grants, the review team concludes.

The review team says William Spears, a UnitedHealth board member who negotiated an employment agreement for the board with McGuire in 1999, served as a trustee for 2 trusts for the benefit of McGuire’s children.

In addition to announcing the end of McGuire’s tenure as chairman, the UnitedHealth board has responded to the review team report by announcing that:

- McGuire will give up his CEO post by Dec. 1, after the company negotiates the terms of his departure.

- Richard Burke, the founding CEO of UnitedHealth and a director since 1977, is now UnitedHealth’s chairman.

- Dr. Stephen Hemsley, who has been UnitedHealth’s president since 1999, will succeed McGuire as CEO.

- United Health probably will delay the filing of its third-quarter Form 10-Q quarterly financial report.

- Spears and David Lubben, the company’s general counsel and secretary, will be leaving.

- UnitedHealth will create separate chief legal counsel and secretary posts, and “the sole responsibility of the secretary will be to support the activities of the board and of its committees.”

- McGuire and most other UnitedHealth senior executives will reprice the options they have received to eliminate “any possible financial benefit from options dating issues” identified in the independent review team’s report.

- Board compensation will be cut 40%,

- The employment agreements for the CEO and president will cut company-funded post-retirement health insurance and certain life insurance and disability premium payments not generally available to other employees.


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