Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, December 22, 2008

SEC Settles Backdating Charges Against UnitedHealth Group and Its Former GC

The SEC today settled charges against UnitedHealth Group Inc. relating to the backdating of stock options. The SEC also settled charges against former UnitedHealth General Counsel David J. Lubben relating to his participation in the stock option backdating scheme. Lubben consented to, among other things, an antifraud injunction, a $575,000 penalty, and a five-year officer and director bar.

The Commission alleges that between 1994 and 2005, UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.

In December 2007, the SEC announced a record $468 million settled enforcement action against William W. McGuire, M.D., the former Chief Executive Officer and Chairman of the Board of UnitedHealth. The settlement, which is pending before U.S. District Judge James M. Rosenbaum, was the first to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors pursuant to the “clawback” provision (Section 304) of the Sarbanes-Oxley Act. McGuire consented to anti-fraud and other injunctions; disgorgement plus prejudgment interest of approximately $12.7 million; a $7 million penalty (the largest penalty against an individual in a stock option backdating case); and reimbursement to UnitedHealth under Section 304 of the Sarbanes-Oxley Act of approximately $448 million in cash bonuses, profits from the exercise and sale of UnitedHealth stock and unexercised UnitedHealth options. McGuire also agreed to be barred from serving as an officer or director of a public company for ten years.

The Commission declined to charge the company with fraud or seek a monetary penalty, based on the company’s extraordinary cooperation in the Commission’s investigation, as well as its extensive remedial measures. UnitedHealth’s cooperation included an independent internal investigation, the company’s release in a Form 8-K of a report detailing the investigation’s findings and conclusions, and the sharing of the facts uncovered in the internal investigation with the government. The company also took significant remedial actions in response to the findings of its internal investigation, including the implementation of new controls designed to prevent the recurrence of fraudulent conduct, removal of certain senior executives and board members, and the recoupment of nearly $1.8 billion in cash, options value and other benefits from several former and current officers, through, among other things, derivative litigation and the voluntary re-pricing and cancellation of retroactively-priced options.

According to the Commission’s complaint, Lubben or others acting at his direction created false or misleading company records indicating that the grants had occurred on dates when the company’s stock price had been at a low. Lubben personally received numerous backdated grants of options, representing as many as 3.8 million shares of UnitedHealth stock on a split adjusted basis. He exercised approximately 1.8 million of those options for approximately $1.1 million in gains attributable to improper backdating.

Lubben consented to the entry of an order permanently enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, proxy statement, and securities ownership reporting provisions of the federal securities laws, and barring him from serving as an officer or director of a public company for a period of five years. Lubben will disgorge ill-gotten gains of $1,403,310 with $347,211 in prejudgment interest and pay a $575,000 penalty.

Under the terms of the settlement, Lubben’s disgorgement and prejudgment interest would be deemed satisfied by his voluntary repricing of his UnitedHealth stock options, which reduced the value of those options by approximately $2.7 million, and his payment of approximately $630,000 in pending settlements to resolve derivative and shareholder lawsuits related to options backdating filed against Lubben in state and federal courts in Minnesota.

In addition, Lubben agreed to resolve a separate administrative proceeding against him by consenting to a Commission order that suspends him from appearing or practicing before the Commission as an attorney for three years.

The Commission’s settlements with UnitedHealth and Lubben in the civil actions are subject to the approval of the U.S. District Court for the District of Minnesota.

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