OPERS and Ohio STRS sue United Health Group re: manipulation of Stock Options

Institutional Investors Sue UnitedHealth Group Challenging Options Grants

Press Release May 23, 2006; Source: Grant & Eisenhofer

Two Retirement Systems of Ohio claim UHG board allowed CEO McGuire to 'hit the lottery' through decade-long manipulation of stock option plan; suit filed by Grant & Eisenhofer in Minnesota federal court

MINNEAPOLIS, May 23 /PRNewswire/ -- In the latest shareholder rumble over alleged back-dating of corporate stock option grants, two major state pension funds have brought suit against UnitedHealth Group, Inc., charging that the health care insurer allowed UHG chairman and CEO William McGuire to "dictate his own compensation through the manipulation of the company's stock option plans" for nearly a decade. The suit, brought as both a derivative and class action, was filed by the Public Employees Retirement System of Ohio and the Teachers' Retirement System of Ohio. The two funds hold over five million shares of UHG stock. Their case was filed in U.S. District Court for the District of Minnesota (UHG's headquarters is in Minnetonka, Minnesota).

The pension funds are represented by noted shareholder and corporate governance law firm Grant & Eisenhofer. In addition to Dr. McGuire, a former pulmonologist who became UHG's chief executive in 1991, defendants include current and former UHG board members, among them former U.S. Vice President Walter Mondale, former New Jersey Governor Thomas Kean, and former U.S. Secretary of Health and Human Services Donna Shalala, as well as current UHG president and chief operating officer Stephen Hemsley.

Over the last several months, UHG has been under increasing scrutiny for possible violation of securities laws in granting Dr. McGuire propitiously-timed options that have translated into $1.2 billion of compensation. A Wall Street Journal analysis published in March showed that the company's recurring options grants to Dr. McGuire and other executives over the years were so consistently timed on the cusp of sharp run-ups in share value as to defy statistical probability.

UHG recently announced that it was restating $286 million in net income for the past three years as a result of the "significant deficiency" in its reporting of the options to financial regulators. Both the Justice Department and the Internal Revenue Service are now investigating the company, along with a formal inquiry underway by the Securities and Exchange Commission that followed the Journal's detailed analysis. Since the Journal's initial report of the company's option timing published on March 18, UHG has lost more than $16 billion in market capitalization.

The funds allege that improper option practices go back at least to 1996, when UHG's board allowed Dr. McGuire to effectively set the strike price for options granted to senior executives. "Dr. McGuire was able to achieve a windfall for himself and his fellow executive(s) ... by retroactively selecting the date on which options were granted," the complaint states. "Dr. McGuire simply picked grant dates on which the share price closed at a relative low point and/or right before a dramatic increase in share price." The company formalized this arrangement in its 1999 employment contract with Dr. McGuire, specifically delegating to its CEO the authority to determine option grant dates for UHG employees.

The suit charges that in rubberstamping and then concealing Dr. McGuire's control of the option grant dates, UHG's directors "completely abdicated their fiduciary responsibilities" to shareholders, leading the company to vastly overstate its earnings and issue false and misleading financial statements since at least 1997.

"Because the company failed to disclose this plan to create an artificially low strike price, shareholders were misled every year at proxy time, when they not only were asked to reelect the directors that created and perpetuated the plan, but were asked ... to vote on shareholder proposals relating to stock options that would have substantially eliminated this practice," the complaint charges. The company was also exposed to enormous potential tax liability for misreporting its option practices.

"Regardless of the success achieved by Dr. McGuire in turning UnitedHealth Group into one of the country's leading health care providers, this case exposes an egregious abuse of executive compensation, in which a single individual was given carte blanche to use stock options as his personal mint," said Jay Eisenhofer, counsel to the pension funds.

The funds' complaint provides a window into UHG's executive compensation practices, including a 1991 Stock & Incentive Plan mandating that a committee of independent directors -- "none of whom shall be officers or employees of the company" -- determine the purchase price of stock options issued. The 1991 plan also required the committee to set any option exercise price "not less than 100% of the fair market value of the Common Shares at the date of grant of such option," a stipulation that should have prevented backdating of the option grants.

"As has become obvious in recent weeks, the company's protocols on options as outlined by its 1991 plan were totally subverted by Dr. McGuire in the years to come," Mr. Eisenhofer said. "UHG not only yielded its authority on options issuance to Dr. McGuire counter to its 1991 plan, but it never challenged his manipulation of the grants to continually hit the jackpot time after time by freely dating the options to coincide with dips in the company's stock price for ten straight years. This is as about as extreme a case of unjust enrichment and breach of fiduciary duty as you'll ever see."

The pension funds assert their claims for each of the options grants issued to Dr. McGuire from 1996-2005, noting that for each period, the CEO selectively chose his own grant dates to match "the best possible dates for him (and) the worst possible dates for the company."

In relief, the funds are asking that the company disgorge all profits gained by Dr. McGuire and COO Mr. Hemsley, while also canceling or rescinding all outstanding options not yet exercised for which there is proof of back-dating or manipulation of the grant dates. The investors are also seeking compensatory and punitive damages against UHG for the various violations of fiduciary duty.

Please let us know if you would like a copy of the complaint or would like to speak with attorney Jay Eisenhofer of Grant & Eisenhofer.

Note: Wilmington, DE and New York-based Grant & Eisenhofer represents institutional investors and shareholders nationally in securities class actions, corporate governance actions and derivative litigation. The firm has recovered more than $2 billion for shareholders in the last five years and was named one of the Top 5 firms for shareholder recovery in 2005 by Institutional Shareholder Services. Currently, Grant & Eisenhofer is lead counsel in shareholder cases against Tyco, Global Crossing, Parmalat, Marsh & McLennan and Refco. In 2005, Grant & Eisenhofer published the Shareholder Activism Handbook, a practical guide for shareholders on corporate governance matters authored by Jay Eisenhofer and Michael Barry. The firm has obtained major corporate governance settlements in shareholder cases against News Corp., Health South and Siebel Systems. For more go to http://www.gelaw.com.

Allan Ripp 212-262-7477 arippnyc@aol.com

Sara Wolosky 212-262-7470 swolosky@hotmail.com