Pension Funds Sue UnitedHealth

In the latest fallout over option grant timing, two large pension funds in Ohio are suing UnitedHealth, charging that CEO William McGuire "retroactively select[ed] the date on which options were granted."

Two Ohio state pension funds are suing UnitedHealth Group, Inc., charging that the health care insurer allowed chairman and CEO William McGuire to “dictate his own compensation through the secret manipulation of the company’s stock option plans” for nearly a decade.

The suit, brought as both a derivative and class action, was filed by the Public Employees Retirement System of Ohio and the Teachers’ Retirement System of Ohio, which combined hold over five million shares of UHG stock. Their case was filed in U.S. District Court for the District of Minnesota.

The defendants include McGuire, who became UHG’s chief executive in 1991, UHG president and chief operating officer Stephen Hemsley, and current and former UHG board members, including former U.S. vice president Walter Mondale, former New Jersey governor Thomas Kean, and former U.S. secretary of Health and Human Services Donna Shalala.

UHG is one of the growing number of companies being investigated for the fortuitous timing of its stock option grants. McGuire has become a lightening rod for critics who were stunned to learn that his stock options at one time had a paper value exceeding $1.6 billion.

The funds allege that improper option practices go back at least to 1996, when UHG’s board allowed McGuire to effectively set the strike price for options granted to senior executives.

“Dr. McGuire was able to achieve a windfall for himself and his fellow executive(s)…by retroactively selecting the date on which options were granted,” the complaint states. “Dr. McGuire simply picked grant dates on which the share price closed at a relative low point and/or right before a dramatic increase in share price.”

The suit charges that in rubberstamping and then concealing Dr. McGuire’s control of the option grant dates, UHG’s directors “completely abdicated their fiduciary responsibilities” to shareholders, leading the company to vastly overstate its earnings and issue false and misleading financial statements since at least 1997.

“Because the company failed to disclose this plan to create an artificially low strike price, shareholders were misled every year at proxy time, when they not only were asked to reelect the directors that created and perpetuated the plan, but were asked…to vote on shareholder proposals relating to stock options that would have substantially eliminated this practice,” the complaint alleges.

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