REINING IN THE EXECUTIVES
Fund groups are joining lawsuits against UnitedHealth and others in what some call the next big wave of corporate scandal.
Whenever the St. Paul Teachers' Retirement Fund Association had a chance to join a shareholder lawsuit against the wayward company of the moment, directors consistently said no.
Charged with overseeing $1 billion in investments for some 10,000 current and retired teachers, the fund's directors decided they didn't have the time or wherewithal to get involved.
But the stock-options scandal at UnitedHealth Group is a different story. They decided that the possible backdating of executive options and the billions of dollars in compensation in question finally met their threshold.
"This is one that is happening in our own back yard," said Phil Kapler, the fund's executive director. "It is one we think stands out as a particularly egregious misuse of control."
The St. Paul teachers fund has joined a pack of plaintiffs and law firms going after the Minnetonka health insurer, one of several companies under scrutiny for the way it handled stock options in the past. A dozen lawsuits have been filed against the company. Some seek the return of money to the company; others seek damages for shareholders.
UnitedHealth, a consistent winner for investors for years, now finds itself an inviting litigation target. No wrongdoing has been confirmed, but investors have lost more than $18 billion as the insurer's stock has tumbled in the wake of allegations. The company has indicated it may have to erase as much as $286 million in past earnings.
The St. Paul teachers retirement fund may be new to the litigation game, but it's linked up with a big league player: Bernstein Litowitz Berger & Grossmann, the New York law firm whose top partners Business Week once dubbed "the Kings of Class Actions."
Among the firm's conquests: prying more than $6 billion out of WorldCom, the telecommunications company that collapsed in the wake of a massive accounting fraud. Bernard Ebbers, former WorldCom chief executive, has been sentenced to 25 years in prison.
Now lawyers are maneuvering to ride what some say is the next big wave of corporate scandals. The probe into possible backdating of option grants goes well beyond UnitedHealth. The Justice Department, the Securities and Exchange Commission and the Internal Revenue Service are investigating at least 22 companies for the practice.
"The backdating of option grants generally, and the magnitude of the backdated options alleged to have occurred at UnitedHealth represents one of the more egregious corporate scandals in recent times and can only be described as greed, pure and simple," argues Gerald Silk, an attorney with Bernstein Litowitz Berger & Grossmann.
In a statement this week, UnitedHealth said, "We intend to vigorously defend the interest of the company and its shareholders." The company has made a number of changes in its compensation program, and an extensive internal review is continuing. Earlier this month, it disclosed that it had identified "a significant deficiency" in the administration and accounting of its option plans.
The St. Paul teachers' fund is listed — in one of a dozen lawsuits filed in federal and state courts — as one of six public pension funds suing to recover money for the company from executives and directors.
The lawsuit alleges that William McGuire, the company's chief executive; Stephen Hemsley, its chief operating officer; and several other UnitedHealth executives received several billions of dollars worth of stock-option grants that were backdated to coincide with dates on which the stock prices were particularly low. That meant bigger profits for the executives when they exercised the options. The backdating makes the options illegal, the lawsuit argues.
The pension funds are asking the court to freeze all unexercised options made to McGuire and Hemsley until the case is resolved, and to force executives to return to the company the money reaped from the sale of the options.
Other actions are aiming to recover money for shareholders, who've watched their stakes in the company shrivel as UnitedHealth's stock has dropped since mid-March, when the Wall Street Journal first reported the questionable options activity.
These plaintiffs include two veterans of the shareholder lawsuit scene. The Public Employees' Retirement System of Ohio and the State Teachers' Retirement System of Ohio were lead plaintiffs in the securities fraud case against the telecom firm Global Crossing, where the class-action settlement has reached $345 million and counting.
The lead counsel in that case — Grant & Eisenhofer, based in Wilmington, Del. — also represents the Ohio funds in the UnitedHealth.
Of all the companies under scrutiny, UnitedHealth "seems to be the biggest and worst offender," said Jay Eisenhofer, the attorney for the Ohio pension funds. The Ohio funds own a combined 5.6 million shares of UnitedHealth stock and manage a total of $130 billion in assets.
In addition to seeking money for shareholders, the Ohio funds are also looking to recover money they think is due the company. It's possible, as cases are consolidated in a legal shuffling, that the two efforts will converge.
Beyond getting their own money back, pension funds tend to join shareholder lawsuits because they see it as a way to keep management accountable, said Professor Niels Schaumann, who teaches corporate and securities law at William Mitchell College of Law.
"The fact of the matter is, if not for these lawsuits," he said, "there would be, oftentimes, no possibility of disciplining management."
Julie Forster can be reached at email@example.com or 651-228-5189.