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UnitedHealth chief to leave over options probe


MINNETONKA, Minn.--UnitedHealth Group Inc. Chairman and Chief Executive Officer Dr. William W. McGuire will leave the company following an independent probe showing that a series of major stock option grants from 1994 through this year were backdated, UnitedHealth announced Sunday.

Dr. McGuire, who has led Minnetonka, Minn.-based UnitedHealth since 1991 and helped grow the health insurer's revenues from $600 million to $70 billion, stepped down immediately as chairman and as a company director.

Dr. McGuire will continue as CEO until his departure on or before Dec. 1 to "assist in an orderly transition to new leadership," UnitedHealth said in its statement.

Stephen J. Hemsley, UnitedHealth's president and chief operating officer since 1999, was selected by the company's board of directors to succeed Dr. McGuire as CEO.

Meanwhile, Richard T. Burke, the founding CEO of UnitedHealth, will replace Dr. McGuire as non-executive chairman, effective immediately.

Additionally, William G. Spears, a member of the board, and David J. Lubben, general counsel and secretary at UnitedHealth, have resigned, UnitedHealth said.

The departure of more company executives remains a possibility, UnitedHealth said. UnitedHealth's board has instructed Mr. Hemsley to "review the conduct of senior executives in the legal, human capital and accounting functions of the company and recommend any additional personnel actions to the board should they be necessary," UnitedHealth said in its statement.

At the same time UnitedHealth announced its sweeping management changes, it released the findings of an independent review of the company's stock option grant practices.

The review was conducted by a special committee of UnitedHealth's board of directors and its independent counsel, Wilmer Cutler Pickering Hale & Dorr L.L.P. The review culled paper and e-mailed documents from UnitedHealth officers and employees whose work was tied to the stock option granting process, along with more than 26 million pages of documents and more than 80 interviews with current and former employees and directors as well as former auditors.

The report focused on 29 distinct option grants made by the company from 1994 through this year, which comprised nearly 85% of the total number of options issued by UnitedHealth during the period.

Among findings, the report stated measurement dates used by the company for most of the 29 options grants "were not correct, and many of these grants were likely backdated," and that option grants made to newly hired employees and employees receiving promotions "were backdated as a matter of policy."

The report stated UnitedHealth's internal controls related to option grants were "inadequate" and senior management "failed to ensure that option granting practices were appropriate."

Additionally, disclosures to the Securities and Exchange Commission with respect to stock option granting practices and related accounting were "not accurate in certain respects," the report said.

Copies of the report have been provided to the SEC and the U.S. Department of Justice, UnitedHealth said.

UnitedHealth also announced reforms to bolster the company's corporate governance and compensation practices that are in addition to steps taken by the board earlier this year.

Among the changes are:

  • Five board seats will be filled by new independent directors during the next three years to bring "new experiences, expertise and perspectives into its membership."

  • A new senior executive position, chief legal officer, will be established through a national search for candidates.

  • The current chief ethics officer and chief administrative officer positions will become senior executive positions.

  • A separate position of secretary to the board will be established to make sure the board's "activities and recordkeeping are in line with best corporate practices."
UnitedHealth also said its third-quarter earnings likely will be delayed given the options investigation and sweeping changes to company structure.

UnitedHealth--which along with a number of other public firms is being investigated by the SEC and other authorities regarding the timing and accounting for stock options granted to executives--said in May that it might be forced to restate several years of financial results stemming from improper oversight for options grants, cutting earnings by as much as $286 million.

Last week, Minnesota Attorney General Mike Hatch won a court ruling to conduct a separate investigation into UnitedHealth's executive compensation practices. UnitedHealth plans to appeal the ruling.