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McGuire Faces Pressure to Leave At UnitedHealth
Investigation Finds Evidence Options Were Backdated;  Board Plans to Meet Sunday
By James Bandler and Charles Forelle
Saturday, October 14, 2006

William McGuire, chairman and chief executive of UnitedHealth Group Inc., faces mounting boardroom pressure to leave the giant health insurer after an internal probe found evidence that stock options were improperly backdated to benefit insiders, people familiar with the matter said.

Dr. McGuire's fate, along with that of general counsel David Lubben, could be decided at a board meeting scheduled to take place Sunday, these people said.

Directors received a detailed briefing on the results of the months-long internal probe Friday in Washington.  The probe was conducted by law firm WilmerHale.  The meeting included a lengthy presentation by Dr. McGuire and his attorney.

UnitedHealth, one of the nation's largest health insurers with a market value of $66 billion, is among the most prominent of the more than 100 companies caught up in the stock-options scandal.  Dr. McGuire has been among the highest-paid executives in U.S. corporate history, amassing an enormous, options-based fortune over his 15 years running UnitedHealth.  At the end of 2005, his unexercised cache of options was valued at $1.78 billion, far and away the largest sum held by any U.S. executive, according to Standard & Poor's ExecuComp.

Also at risk are several directors on UnitedHealth's 12-member board who served on its compensation committee during the period when the improperly dated grants were awarded, the people familiar with the situation said.  Some past compensation-committee members include former New Jersey Gov. Thomas H. Kean, New York money-manager William Spears and Columbia University nursing-school dean Mary Mundinger.  None of the directors could be reached for comment.

As of Friday, people close to the situation said, many board members had decided Dr. McGuire would have to depart.  But they cautioned that the situation is fluid, and directors are wrestling with a difficult and complex decision.

Another person close to the situation said Dr. McGuire has insisted that he always believed the grant dates were picked based upon an actual meeting, either in person or over the phone, even though the compensation committee didn't formally approve the grants until after the grant's stated date.  This person added that there were problems with the record-keeping to document grants at UnitedHealth, and that parties involved had "faint recollections" about what happened.

At the same time, while Dr. McGuire is a highly regarded leader of the company, directors know that executives, and possibly UnitedHealth itself, face the prospect of civil action from the Securities and Exchange Commission in the options matter.  The matter also is being probed by federal prosecutors in Manhattan and by Minnesota's attorney general.

At issue in the UnitedHealth case and others are questions about whether stock options were improperly backdated.  Options are designed to give recipients the opportunity to profit if the company's share price rises in the future.  Grants typically are structured so that the recipient can buy shares later at the stock's market price on the day the option was granted, called the exercise price.  Backdating involves pretending that the grant was awarded on an earlier day, when the share price was particularly low, giving the recipient a chance at extra profit.

A spokeswoman for UnitedHealth declined comment.

During his tenure at the helm of UnitedHealth, Dr. McGuire has year after year received giant grants of options.  In many of those years, the purported dates were suspiciously fortunate.  Between 1994 and 2002, he received 12 grants, each dated just before a sharp rise in the company's share price.  Three grants -- in 1997, 1999 and 2000 -- were dated on the day of the stock's lowest closing price of the year.

A Wall Street Journal analysis published in March found that the odds of such a fortunate pattern of dates occurring if the dates were chosen at random were infinitesimal -- less than one in 200 million.  The company said at the time that its granting process was "appropriate," but the article spurred the internal investigation as well as probes by authorities.

Until recently, some people familiar with the matter said, Dr. McGuire's chances of surviving the options investigation seemed fairly high.  These people said the options problems -- which the company had previously indicated would likely cause it to restate financial results -- appeared confined to sloppy bookkeeping.  But the WilmerHale probe concluded that the issues ran deeper and included backdating of option grants, said people familiar with its findings.

A spokeswoman for WilmerHale declined comment.

The climate surrounding backdating has darkened in recent days.  This past week, 10 corporate officials, including four CEOs, left their posts amid options problems at their companies.  Earlier this month, Apple Computer Inc. said Fred Anderson, a director who was a former finance chief at the company, had resigned from its board following a probe that identified 15 instances of backdating.  Apple said its iconic CEO, Steve Jobs, knew about backdating at the company, but wasn't aware of its accounting implications.

Dr. McGuire, a Texas native and a pulmonologist by training, quit clinical practice in the 1980s to stake his claim in the bustling business of health insurance.  His employer was bought by UnitedHealth, and Dr. McGuire arrived in Minnesota and established himself as a star.  By 1991, he was CEO.

By many measures, Dr. McGuire holds a place among the most successful corporate executives of the modern era.  UnitedHealth shares have risen about 50-fold during his tenure.

The massive grants of stock options, meanwhile, have yielded him hundreds of millions of dollars in profit, the cornerstone of a large fortune.  He hasn't been the only beneficiary;  No. 2 on the Standard & Poor's ExecuComp list of executives with the greatest value in options was Stephen Hemsley, Dr. McGuire's top lieutenant at UnitedHealth, who had a fortune of somewhat less than half of Dr. McGuire's stake.

Dr. McGuire benefited handsomely from the munificence of the UnitedHealth board's compensation committee, which -- in addition to the options -- granted him generous salaries and bonuses and a hefty retirement deal.  "We're so lucky to have Bill," Ms. Mundinger, a longtime compensation-committee member, told the Journal earlier this year.  Of his rising pay, she said:  "He needs to be compensated appropriately so that his business model has believability in the market."

The largest grant Dr. McGuire received came in 1999, entitling him to purchase 1.825 million shares of the company's stock.  Adjusted for several splits that have occurred since then, it is equivalent to 14.6 million shares.  He so far has exercised only about 5% of the options, and his profit on the shares remaining would be about $600 million if cashed in today.

But the grant's timing, in October of that year, raises eyebrows:  It was dated at the stock's lowest point all year.

In March, Mr. Spears, the UnitedHealth director, told the Journal that the 1999 grant wasn't backdated to that propitious time.  Rather, he said, the low price encouraged directors and Dr. McGuire to wrap up negotiations over a new employment agreement.

What would happen to Dr. McGuire's outstanding grants should he have to depart isn't clear.  In April, with questions swirling about backdating, Dr. McGuire said he and other senior executives would no longer take options.

Write to James Bandler at james.bandler@wsj.com and Charles Forelle at charles.forelle@wsj.com

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