I don’t think anybody will be surprised by the news that the SEC is looking into United Healthcare after their ex-CEO William McGuire’s stock option mess.
McGuire was appointed president and CEO of what was then United Healthcare Corp. in 1989, then named chairman and CEO in 1991. Acquisitions he engineered helped United Healthcare rise from a regional health insurer into one of the largest managed care companies in the country and one of the biggest health insurance companies in Colorado.
McGuire strived for more efficiency in the delivery of health care by doing things like putting patient information in a magnetic strip on the back of health insurance cards, and encouraging insureds to use the Internet instead of live phone operators for requests like switching doctors.
Shareholders liked the changes he made. Adjusted for splits, United Healthcare shares rose from about 30 cents per share in 1990 to a peak of $62.14 in December. A $10,000 investment then would have been worth more than $2 million at its peak.
–Almost answers the question: “Why was his salary so big?” Answer: “Because they increase the value of their company so much.”
United Healthcare’s board rewarded McGuire, granting him options to buy shares. As the stock price rose, the value of those options grew to $1.6 billion by the end of 2005.
Then in March, the Wall Street Journal reported that McGuire had received stock options on the days the company’s stock price hit yearly lows in 1997, 1999, and 2000, and that other options grants had occurred on low spots in the company’s share price. Statistically, that was nearly impossible unless the options were granted retroactively.
On Sunday, the firm hired by United Healthcare’s directors found that was likely what happened.
The firm looked at 29 options grants between 1994 and 2006. It found that most of those options grants didn’t show a written grant date or price until weeks or, in one case, nearly a month after the grant date.
The report also found that United Healthcare’s options-granting policy for new hires “amounted to backdating in order to obtain a favorable strike price,” the price at which the option becomes profitable.
Backdating stock options isn’t always illegal, but failing to disclose it can trigger tax and regulatory problems. Indeed, on May 11, United Healthcare admitted a “significant deficiency” in its handling of stock options and said it may have to restate as much as $286 million in earnings for 2003, 2004, and 2005.