UnitedHealth Derivative Settlement “Largest Ever”

To see this page on The D & O Diary's new website, click here. To go to the home page of The D & O Diary's new website, click here.

On December 6, 2007, UnitedHealth Group announced (here) that its Special Litigation Committee had concluded its review of claims relating to the company’s option backdating practices that had been brought against certain of the company’s directors and officers.

The company also announced that its former CEO William McGuire had agreed surrender certain rights and interests which, together with previous repricing of all stock options awarded to McGuire, have a value in excess of $600 million.

Certain other current and former officers also agreed to relinquish certain rights and repay other amounts, which in combination with the repricing of certain stock option, have a value of approximately $300 million.

According to the company’s statement:

The SLC has valued the total amounts to be relinquished pursuant to these settlement agreements, together with the value previously and voluntarily relinquished by current and former executives, through the surrender and repricing of options, to be approximately $900 million.

A December 6, 2007 Bloomberg.com article (here) states that “if approved by a court, the settlement …would be the largest ever in a ‘derivative’ suit…according to data compiled by Bloomberg.”

Separately, the SEC announced on December 6, 2007 (here) that it had reached a $468 million enforcement action settlement with McGuire, which, the SEC said, includes the “largest penalty assessed against an individual in an options backdating case.” The $468 million SEC settlement consists of “a $7 milllion civil penalty and reimbursement to the Minneapolis-based health care company for all incentive- and equity-based compensation he received from 2003 through 2006.”

The SEC’s press release also stated that the McGuire settlement “is the first with an individual under the ‘clawback’ provision (Section 304) of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors.”

According to UnitedHealth’s press release, McGuire’s settlement consists of the following elements:

• Surrender to UnitedHealth Group certain stock options to acquire 9,223,360 shares of Company stock, which the SLC has valued at approximately $320 million;


• Surrender his interest in the Company’s Supplemental Executive Retirement Plan, valued at approximately $91 million;


• Surrender to the Company approximately $8 million in his Executive Savings Plan Account; and


• Relinquish claims to other post-employment benefits under his Employment Agreement.

According to the company. these amounts, combined with a previous repricing of all stock options awarded to Dr. McGuire from 1994 to 2002, result in a total value to be relinquished by McGuire in excess of $600 million.

A copy of McGuire’s settlement agreement with the company and the derivative plaintiffs can be found here.

The UnitedHealth press release described the settlement with the company’s former General Counsel, David Lubben, as consisting of the surrender to UnitedHealth Group of his stock options to acquire 273,000 shares of Company stock, which the SLC valued in excess of $3 million; and the repayment to the Company $20.55 million of the compensation realized by him as a result of his March 2007 exercise of stock options.

According to the company, these amounts, combined with a previous repricing of stock options awarded to Lubben, result in a total value relinquished by Lubben of approximately $30 million.

A copy of the settlement agreement between Lubben and the company and the derivative plaintiffs’ counsel can be found here.

The UnitedHealth press release also stated that under the settlement agreement that the company reached with its former director William Spears, “the fair settlement value of the Company’s claims … will be determined by binding arbitration.”

According to the Bloomberg article, current United Health CEO Stephen J. Helmsley had agreed to repay $240 million, although the company apparently says he voluntarily did so months ago.

A copy of the UnitedHealth special litigation committee’s December 6, 2007 report can be found here.

The Wall Street Journal's December 7, 2007 article discussing the settlement can be found here.

Special thanks to alert reader Kelly Reyher for sending alerting me to this story and sending along the Bloomberg link.

The magnitude of these settlements is obviously arresting. The scale of the settlements is proportionate to the scale of the backdating problems at UnitedHealth, which had forced the company to restate $1.13 billion in earnings over a 12-year period. The scale of these settlements could have a significant impact on at least some of the other pending options backdating derivative cases, particularly where the company has been forced to restate and where top company officials have personally benefited from the backdating.

Readers should note that the table I am maintaining of all options backdating related settlements, dismissals and denials can be accessed here.

From a D & O insurance perspective, it is noteworthy that all or virtually all of the amounts to be paid to the company or to the SEC may be characterized as disgorgement, return of ill-gotten gains, return of compensation to which the individual was not legally entitled, or fines and penalties. Assuming that these are in fact accurate characterizations of the settlement payments, these amounts would not constitute covered loss under the typical D & O insurance policy.