William McGuire's relationship with the compensation committee of the UnitedHealth Group Inc. (UNH) board of directors grew "potentially precarious" in 1999 as the chief executive officer attempted to negotiate a new employment contract that contained a substantial amount of stock option awards, according to court documents filed Wednesday.
At one point, according to the testimony of former general counsel David Lubben, one member of the committee proposed an option strike price that was higher than the market value of shares at the time, and which would not immediately be profitable for McGuire.
"It was my concern that the parties were moving further apart, not closer together, and that it was becoming a more tense negotiation," Lubben said in a deposition for a shareholder lawsuit against the Minnetonka-based company filed by the California Public Employees Retirement System (CalPERS).
But what happened next led to a controversial memo that CalPERS contends was the work of McGuire and was an acknowledgement of options backdating.
CalPERS says that the memo contains McGuire's notice to the board that in the past, the exercise price of an option was lower than the price on the date the option was issued -- backdating.
Lawyers for McGuire said the plaintiff's characterization of the memo is an "inflammatory accusation" made on a "no good faith basis."
In documents filed Wednesday in federal court in Minneapolis, they say that Lubben -- not McGuire -- wrote the memo, and that it was only a draft that never went to the board or to anyone else.
Portions of Lubben's testimony were contained in the McGuire motion. Lubben said he sat down and wrote "a memo as if I were Dr. McGuire" to marshal his thoughts about how the parties might agree on an option term and complete the negotiations.
The memo, in part, said, "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."
Lubben testified that he didn't recall discussing the memo with McGuire beforehand or after he wrote it.
The board eventually approved options for McGuire at $40.125, according to a report by the WilmerHale law firm of Washington, D.C., which was retained by the board in 2006 to look at options backdating.
Ruling triggered motions
The flurry of motions in recent days reflects a ruling by Magistrate Judge Franklin Noel earlier this week to unseal testimony and documents that previously had been withheld.
The motions are in advance of a hearing before U.S. District Judge James Rosenbaum later this month on an effort by UnitedHealth, McGuire and other defendants to have the case tossed out through a summary judgment.
CalPERS claims shareholders were harmed by the backdating controversy, which led to a downward revision of earnings by UnitedHealth of $1.56 billion over 12 years. The company asserts there was no damage to shareholders as the stock held steady and even rose in value as news of backdating at UnitedHealth and other U.S. companies swirled around Wall Street.
David Phelps • 612-673-7269
