As top UnitedHealth Group executives were compensated with favorably priced stock options, there was concern at lower levels in the company going back years about the appropriateness of the practice, according to court documents unsealed Tuesday.

The documents assert that former Chief Executive Dr. William McGuire was warned as early as 1991 by an in-house lawyer "that possible backdating of stock options grants had taken place," although McGuire testified he had no recollection of that conversation.

Documents suggest that executives were disappointed in 2002 by tougher accounting standards.

"First of all, don't you think our officers are having a bad day relative to stock options" the manager of stock option administration wrote to the vice president of tax following an announcement by General Electric that it would adopt a more stringent accounting policy relation to options.

"The accounting and legal folks want UHG grant reform (no more look-back grant dates/prices for anyone), but I think the HR people would like to hold onto that feature for as long as they can!" the e-mail continued.

The documents were filed by the California Public Employees Retirement System (CalPERS) as part of a shareholder suit against UnitedHealth.

The filings suggest that independent auditors who reviewed the company's financial statements were unaware that backdating occurred.

The document quotes one auditor as saying, "Our understanding was that the company ... would not issue an option less than 100 percent of the fair market value on the grant date."

The document is a motion by CalPERS opposing a UnitedHealth attempt to dismiss the class-action lawsuit before it goes to trial by granting summary judgment in favor of the company.

UnitedHealth claims that its stock was unharmed by the backdating issue and even flourished.

The CalPERS motion was initially filed in May but contained blacked-out sentences and paragraphs redacted under terms of a confidentiality agreement between the two parties. But CalPERS challenged the validity of using the agreement to justify suppressing parts of the motion, and Tuesday a federal judge agreed.

Magistrate Judge Franklin Noel said the redacted material involving UnitedHealth documents and testimony in depositions about backdating did not meet the confidentiality standards.

CalPERS is suing UnitedHealth on behalf of shareholders on the grounds that widespread backdating of stock options for employees and top executives financially harmed shareholders. UnitedHealth in turn claims its share price was unaffected by the options controversy.

McGuire contends in a separate filing that he did not know the options were incorrectly recorded in company books.

The suit is tentatively set for trial in September.

A memo from McGuire

The CalPERS motion is a document attempting to substantiate its allegations that backdating was a common practice at the top of UnitedHealth and that it was inappropriately accounted for in the company's books, eventually resulting in a $1.56 billion downward restatement of earnings over a 12-year period.

The motion quotes a 1999 memo from McGuire to the board of directors' compensation committee which states: "We have historically followed an approach to option grants that seeks to give employees the most defensibly favorable exercise price. On many occasions in the past, we have revised the option price to reflect a lower exercise price that occurs before an option is actually issued."

In a separate filing, attorneys for McGuire disputed the legitimacy of the memo and said that McGuire did not write, request that it be written or discuss it with anyone in the company.
Even new hires were granted backdated options. The practice, according to the documents, was well-established, with stock options backdated to dates when the stock price was lower so as to maximize profits.

In 2001, the president of human capital wrote, "There are no challenges on this topic -- grant dates and the corresponding strike price and vesting terms are set by me, [current CEO] Steve Hemsley or Bill McGuire."

The documents indicate that later there was some level of internal discussion over whether the backdating was proper.

"I thought we had tried to stop this practice of looking back to the previous quarter," the director of corporate accounting said in a 2002 e-mail to the controller.

David Phelps • 612-673-7269