UnitedHealth Group Inc. (UNH) will pay $895 million to settle a class-action lawsuit concerning backdated stock options, a move the former Wall Street darling hopes will put an end to a long-simmering scandal so it can focus on turning its struggling business around.
The country's biggest health insurer also said Wednesday that it was cutting 4,000 jobs nationally, about 6 percent of its workforce, and for the second time lowered its profit forecast for 2008. It's unclear how many jobs will be lost in Minnesota, where UnitedHealth employs 10,000 people.
"The settlement provides UnitedHealth Group with certainty and closure in this lawsuit, avoids potentially costly and protracted litigation, and allows us to continue to focus on providing Americans with high-quality, affordable health care solutions," chief legal officer Thomas Strickland said.
UnitedHealth, based in Minnetonka, will pay $895 million into a settlement fund for class members in a securities fraud lawsuit led by the California Public Employees' Retirement System (CalPERS) and Alaska Plumbing and Pipefitting Industry Pension Trust.
Half the payment could come by Sept. 15 and the remainder by year's end, Strickland said.
Neither the company nor any individuals admitted any wrongdoing. The settlement includes several fixes to corporate governance, including adding a shareholder-nominated director to the board.
"We are pleased with the settlement in terms of the size and the corporate governance [measures]," said Ramzi Abadou, an attorney for CalPERS.
While the proposed deal is a milestone in a stock-options scandal that goes back two years, the case isn't over yet.
It must be approved by the boards of UnitedHealth and CalPERS, as well as the court. While it includes all current officers and board members of UnitedHealth and some former ones, it does not include former Chief Executive William McGuire or former general counsel David Lubben.
Both stepped down in late 2006 after an internal investigation found that grant dates for stock options were likely backdated to times when the share price was lower so as to maximize gains when executives sold stock.
CalPERS will continue to pursue its case against McGuire and Lubben, Abadou said. The case is set for a fall trial.
Another suit settled
"Despite the settlement, Dr. McGuire will continue to fight, because he's not liable for any alleged shareholder losses," McGuire's attorney David Brodsky said in a prepared statement. "There is no evidence that would establish that Dr. McGuire knew that UnitedHealth's accounting for stock option grants or financial disclosures were false or misleading."
Lubben's attorney, Richard Mark, said he had no comment.
UnitedHealth also announced a separate settlement Wednesday to pay $17 million to resolve another class-action case related to the Employee Retirement Income Security Act. Most of that will be paid by the company's insurance carriers.
'Rarely seen in civil litigation'
In 2006, revelations of options backdating at UnitedHealth and other high-flying companies led to a flurry of shareholder lawsuits and investigations by regulators. For UnitedHealth, the cases are playing out in a complicated dance across several courtrooms in Minneapolis.
"It's a level of complexity rarely seen in civil litigation," said Karl Cambronne, lead counsel in a separate options lawsuit that reached a tentative settlement in December. Under that agreement, McGuire and other executives agreed to give back a total of more than $900 million in stock option value and other benefits to UnitedHealth. McGuire also agreed to pay a record $7 million fine to the Securities and Exchange Commission.
However, the December deal is now in jeopardy, after a federal judge, James Rosenbaum, asked the Minnesota Supreme Court to what extent he could review its merits. Rosenbaum is also presiding over the CalPERS litigation.
Now, with CalPERS continuing to pursue McGuire and Lubben, Cambronne said, "the 'what-if's' are huge."
UnitedHealth's stock price rallied briefly with the morning's news, but ended Wednesday 51 cents lower, at $25.12. That's much less than its high this year of $56.93 on Jan. 3.
Even without the stock options litigation, UnitedHealth has enough problems in its day-to-day business.
In a morning conference call with investors Wednesday, Chief Executive Stephen Hemsley lowered the company's profit target for 2008 to between $2.95 and $3.05 per share, on revenue of $81 billion. The company had previously projected between $3.55 and $3.60 per share for the year.
Among the reasons Hemsley cited: rising medical costs, the cancellation of three big clinical research projects by pharmaceutical companies and the failure of their much-hyped "Special Needs Plans" for chronically ill senior citizens to make money for the company.
Benefits for the new Special Needs Plans had turned out to be "too attractive," Hemsley said, meaning that members had used more medical care than the company expected when it set premiums. UnitedHealth has stopped marketing the plans in major markets.
Wall Street analysts looking for assurances of a return to growth didn't find much. Hemsley said that he expected the market to "continue to be challenging," and his stated fixes -- including strengthening ties to local markets -- echoed remarks made during an earlier analyst call.
"My burning question is: Why should we believe they're going to work this time?" asked Sheryl Skolnick, an analyst with CRT Capital in Stamford, Conn.
Chen May Yee • 612-673-7434