October 21, 2006
Heads I Win, Tails I Win More
Dr. William McGuire, the retiring CEO of health insurer UnitedHealth Group, Inc., is making quite a name for himself in the field of options back-dating and excessive executive pay. His stock options, even after a repricing to eliminate the effects of back-dating, will still be worth over a billion dollars, at least as long as he keeps them. An AP story (here) notes that a sizable slug of those options may have been the result of a award of the same options twice. In 1999, when a set of UnitedHealth options were "under water" because the exercise price was below the current stock price, Dr. McGuire recommended to the board that the options be reissued at a lower price. Those options were backdated so they were already worth more, but then later Dr. McGuire recommended that the original options be reactivated after the stock price had risen significantly, meaning he and a number of employees effectively received the options award twice. Needless to say, that little sleight of hand resulted in improper accounting, but even more problematic will be the attention this will draw from the SEC and criminal investigators. Dr. McGuire's reactivated options are now worth over $250 million.
For companies enduring options back-dating investigations and the accompanying government scrutiny, a San Francisco Chronicle story (here) notes that the Directors & Officers insurers may object to paying the costs of defending the company and resulting settlements to the government and shareholders when the problem is self-inflicted. Of course, that was also true in the last round of corporate accounting problems, so look for the insurers to raise their rates even more to insure corporate malfeasance. (ph)
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