Dr. William McGuire, the former chief executive of UnitedHealth Group who lost his job a year ago in the wake of a stock options scandal, agreed Thursday to surrender an additional $420 million in options and other benefits he obtained while running the nation's biggest health insurer.
The amount is in addition to $198 million in stock option value relinquished by McGuire a year ago.
McGuire also agreed to pay a record $7 million fine to the Securities and Exchange Commission (SEC) to settle an 18-month investigation by the federal regulator into charges that he misled investors by favorably pricing his options and those of other senior executives to make a greater gain when they were exercised.
He did not admit or deny wrongdoing under the agreement, the SEC said.
The blockbuster settlement, with a total value of $618 million, is by far the largest to date in backdating scandals that roiled corporate America in 2006. "These are pretty big numbers," said Rajesh Aggarwal, an associate professor of finance at the University of Minnesota's Carlson School of Business. "If you were another CEO and you were caught up in a stock options scandal, this is the kind of thing that would make you nervous."
The settlement was also the first of its kind against an individual by the SEC using a "clawback" provision under the Sarbanes-Oxley act aimed at depriving executives of stock profits and bonuses earned while misleading investors.
As part of the settlement, McGuire, who in recent years was one of the highest-paid executives in Minnesota, has repriced all of his stock options and will surrender roughly one-third of the remaining options that were granted to him over the past 12 years, with an estimated value of $320 million. He also will forgo a $91.5 million fully vested pension and $8 million in an executive savings plan.
A year ago he agreed to the repricing of all stock options awarded between 1994 and 2002, which reduced the estimated value by $198 million.
"The size of the settlement with Dr. McGuire reflects the egregiousness of his conduct," said Rick Firestone, the SEC's associate director of enforcement, noting that $7 million is the largest civil penalty paid by an individual in an options case.
Former UnitedHealth general counsel David Lubben also has agreed to repay the company through forfeited and repriced options and cash, to the tune of $30 million. Former board member William Spears has agreed to binding arbitration to determine his forfeiture amount. The total reimbursement to the company, including McGuire's share and previous repricing by other executives, is more than $900 million.
The Corporate Library, a watchdog of corporate governance issues, said resolution of the backdating issue is a huge step toward righting the company. "The company's been working extremely hard to reverse poor governance decisions made in the past," said Paul Hodgson, a senior research associate at Corporate Library, which is based in Portland, Maine. "This is a final piece of the puzzle."
The agreement settled shareholder lawsuits in both federal and state court.
"Resolution of the financial aspects of this case are clearly in the best interests of the company," said Karl Cambronne, lead attorney in the consolidated shareholders lawsuits. "Those persons who have agreed to relinquish options and/or pay cash back to the company have taken the right and honorable course in helping UnitedHealth end a troubling chapter in an otherwise flourishing history."
But left unanswered by the settlement is the status of a Justice Department investigation into the legality of the options backdating. A separate shareholder lawsuit by the California Public Employees Pension System also remains and Minnesota Attorney General Lori Swanson is conducting an investigation. The SEC said it is also continuing its investigation.
In a prepared statement, McGuire said he is "very pleased" to "put these matters to rest." McGuire said he was proud of his accomplishments at UnitedHealth and wished the company well.
"The last 18 months have been an extraordinarily challenging period for my family and me," he said.
The settlement announcement Thursday is the result of a long-awaited report by outside attorneys hired by the UnitedHealth board of directors to review and evaluate the strength of the legal claims against the company. The "special litigation committee" consisted of former Minnesota Supreme Court justices Kathleen Blatz and Edward Stringer.
McGuire's problems with backdated stock options developed in early 2006 after a report in the Wall Street Journal revealed that dozens of top-ranking corporate executives across the country routinely backdated options to obtain the most favorable trading price when the options were exercised.
The flap hovered over the company like a dark cloud until October 2006, when another special report by a Washington law firm concluded that McGuire "likely" had backdated his options and the options of other executives.
McGuire stepped down as UnitedHealth chairman when the law firm report's conclusions were presented to the board, but he remained as chief executive until Dec. 1, 2006. McGuire wasn't alone in the options scandal. Spears, who was chairman of the compensation committee that authorized the backdated options, also left the board, and Lubben, who the report said knew of the backdating activities, took early retirement.
In the seven years from 2000 to 2006, McGuire's total compensation was $478.4 million, including salary, bonus, long-term incentive compensation and exercised stock options. His gains from options exercised during that period came to $420 million, accounting for the bulk of his total compensation.
And despite Thursday's settlement, McGuire retains a significant financial stake in UnitedHealth. According to documents filed with federal regulators in April, McGuire owned 651,111 shares and held options to buy another 31.5 million shares. At current prices, those shares would have an estimated value of $1.8 billion, though that does not include the price McGuire would have to pay to exercise those options.
Chen May Yee contributed to this report. David Phelps • 612-673-7269