UnitedHealth Group CEO Stephen Hemsley was more involved in the handling of backdated stock options than previously revealed, according to new documents filed in a shareholder lawsuit that is moving toward a fall trial.

Despite two company-ordered investigations that largely exonerated Hemsley from the backdating scandal, the latest filing in U.S. District Court in Minneapolis attempts to paint a different portrait of Hemsley and the corporate practice of providing top executives with favorably priced option grants.

"Hemsley personally offered backdated options to new hires, was required to approve all grants in excess of 5,000 shares [and] approved backdated mass grants," asserts the brief in the lawsuit that has the California Public Employees' Retirement System (CalPERS) as lead plaintiff.

The company denies the assertions, noting that Hemsley was cleared from involvement by independent organizations paid for by the UnitedHealth board to examine the practice of awarding options at a hand-picked low price to maximize value as UnitedHealth's stock rose.

"Assertions by plaintiffs who are suing us do not change these conclusions," UnitedHealth said in a statement to the Star Tribune. "Mr. Hemsley has been credited with an extraordinary job of leading UnitedHealth in the last 18 months to one of the best corporate governance records in the country."

The description of Hemsley's purported role in the backdating process is contained in a motion by CalPERS and other shareholders opposing UnitedHealth's attempt to get their lawsuit dismissed. UnitedHealth asserts that shareholders did not suffer losses as a result of the stock option revelations.

"When the issue of options backdating was disclosed, the market treated it with indifference and there was no abnormal movement in United's stock," the company says in its dismissal filing.

A hearing is scheduled for June 3 before U.S. District Judge James Rosenbaum.

The shareholders contend that there were real losses, in part because the backdated options were not properly accounted for and resulted in 12 years of restated financial results for UnitedHealth. The pretax effect of those adjustments was a cumulative downward restatement of earnings by $1.56 billion.

The practice of backdating options led to the resignation of William McGuire, who was CEO and board chairman, in late 2006. Hemsley, then chief operating officer, succeeded McGuire as CEO.

CalPERS says in its brief that Hemsley should have known about the backdating problems "given his considerable background as a former Arthur Andersen partner."

"Hemsley also understood the broad-based grants were in-the-money and should have been expensed [under an accounting rule]," the plaintiffs' brief states. "Hemsley routinely approved backdated mass grants."

UnitedHealth said Thursday "these are issues that will be addressed and dealt with in court, not the press."

A sharp contrast

The CalPERS filing contains a number of blacked-out references to internal corporate memos, e-mails and documents that were sealed under a protective order to keep company business and employee records confidential. The brief cites these as evidence of the widespread knowledge of option backdating.

The CalPERS position regarding Hemsley is in sharp contrast to previous investigations.

In October of 2006, a report from the Washington, D.C., law firm of WilmerHale concluded that backdating practices largely were controlled by McGuire, and Hemsley had only a minor role.

"His focus was on the recipients of the grants among non- executive officers," the report said. "He has stated that he was unaware of how grant dates were selected but understood that Dr. McGuire was generally in communication with Dr. [William] Spears of the [board's] Compensation Committee."

Of a 1999 employment agreement in which Hemsley got 500,000 options and McGuire got 1 million, the WilmerHale report concluded, "Mr. Hemsley had little or no role in the negotiation of, or the process leading up to, the agreement or the option award in connection with the agreement."

The report also concluded that the 1999 option grants "were likely backdated."

A "Special Litigation Committee" hired by UnitedHealth's board to review shareholder lawsuits reported last year that Hemsley's role in the backdating was minor.

"Although Mr. Hemsley received significant stock option grants during the time period cited in the [lawsuits] ... his responsibilities during that period were focused primarily on the company's operations," the committee said.

Hemsley has since repriced all of his stock options to the highest share price of each year in which they were granted.

McGuire, who was fined a record $7 million by the Securities and Exchange Commission, also repriced his considerable amount of stock options and gave up some. The SEC inquiry is ongoing; the status of a separate Justice Department investigation is unknown.

David Phelps • 612-673-7269