- The Washington Times - Sunday, October 15, 2006

MINNEAPOLIS (AP) — The stock-options scandal claimed its biggest corporate chief yet yesterday, with UnitedHealth Group Inc. saying Chairman and Chief Executive Officer 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 Dr. 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 yesterday. Dr. McGuire will step down immediately as chairman and as a director. The company said that Dr. 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 report found that Spears, a member of the board’s compensation committee, managed some of McGuire’s money, something that other board members didn’t believe they had been told.

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. There may be many more to come: At least 135 companies have disclosed Securities and Exchange Commission, Department of Justice or internal investigations according to an Associated Press review.

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

Dr. 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.

Dr. McGuire has pushed for more efficiency in the delivery of health care by measures such as putting patient information in a magnetic strip on the back of insurance cards, and encouraging customers to use the Internet instead of live phone operators for tasks such as switching doctors.

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. A $10,000 investment then would have been worth more than $2 million at its peak.

UnitedHealth’s board rewarded Dr. 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 Dr. 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.

Yesterday, the firm hired by UnitedHealth’s directors found that probably was the case.

The firm looked at 29 options grants between 1994 and 2006. It found that most of those options grants didn’t show a written grant date or price until weeks or, in one case, nearly a month after the grant date.

The report concluded that “many of the options grants were likely backdated.”

The report found eight cases where options were granted on the lowest price of the quarter, all of them before Aug. 29, 2002, when the Sarbanes-Oxley law began requiring quicker disclosures of stock-options grants. After that, the number of such well-timed options grants dropped to zero.

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