Monday, October 16, 2006
UnitedHealth Group, Inc. CEO Dr. William McGuire has been forced out by the board of directors over suspiciously-timed options grants, reports the Wall Street Journal (here). The company's general counsel, David Lubben, is also leaving after an internal investigation in which assertions by company executives that options were not back-dated were not entirely credible. The report on the investigation, which the company made available (here), states that many of the options grants to senior executives "were likely backdated" and that "certain facts run contrary" to Dr. McGuire's assertions about the options award process.
Dr. McGuire became something of a poster child for exorbitant executive pay, with unexercised options worth almost $1.75 billion -- that's right, billion not million -- and gains of almost $115 million in 2004 and $124 million in 2006 from exercising a small slug of his options. The Journal story notes that twelve option grants from 1994 to 2002 to Dr. McGuire, among ohters, were made shortly before an increase in UnitedHealth's stock price, and in three years the grants were at the low price for that year, a remarkable coincidence that may explain in part the high value of his stock options. It appears that at least some of the grants involved back-dating, which has become the kiss of death for CEOs and other senior officers. The company postponed filing its 10-Q in August 2006 and still has not filed any financial statements due to accounting issues related to the options back-dating.
The timing of Dr. McGuire's departure likely means that a restatement will be coming soon, or at least an estimate of the financial hit from the manipulation of the options grants. After the CEO dismissals in the past week (see earlier posts here and here), UnitedHealth may have set the tone for the coming week of more of the same. The problem for Dr. McGuire will be that his gains from the options exercises is likely to draw even greater interest from federal prosecutors in the results of UnitedHealth's internal investigation. The U.S. Attorney's Office for the Southern District of New York has subpoenaed the company, and that district has not yet brought a criminal case from the options back-dating investigations yet, unlike the Northern District of California (Brocade Communications) and Eastern District of New York (Comverse Technology). The SDNY prosecutors may be looking to make a big splash soon, and Dr. McGuire could be the unlucky target. (ph)