Former UnitedHealth CEO settles lawsuit

Former UnitedHealth Group Chief Executive William McGuire has agreed to pay a record $30 million to settle a class-action lawsuit led by the California Public Employees' Retirement System (CalPERS).

Without admitting wrongdoing, McGuire agreed to pay the cash into a fund that will include $895 million to be paid by UnitedHealth Group and other executives, who settled with CalPERS in July.

It was the biggest cash settlement so far by an individual in a case involving stock options backdating. This is the third settlement for McGuire. He earlier paid a record $7 million fine to the Securities and Exchange Commission, without admitting wrongdoing.

McGuire also has relinquished a total of $618 million in options and other benefits obtained while running UnitedHealth.

Over the past two years, backdating scandals have ensnared about 200 other companies, including Apple Inc. and Monster Worldwide Inc., in various shareholder lawsuits and investigations by regulators and their own boards.

Stock options are a popular form of executive compensation, especially for fast-growing companies with soaring stock prices. Backdating stock options allows a company to pick a date when the share price was lower, locking in an instant profit. Backdating isn't illegal, but not properly accounting for it is.

McGuire also agreed as part of Wednesday's settlement to forfeit 3.675 million stock options received between 2003 and 2005. Those options are worthless at today's share price, but would have had future value if the share price were to rise.

"I am pleased to be able to help bring the stock-option dating issues closer to complete resolution," McGuire said in a statement Wednesday.

Another former UnitedHealth executive, general counsel David Lubben, will pay $500,000.

"David Lubben is pleased to have resolved this matter subject to court approval," said Seth Levine, his attorney in New York.

CalPERS called the settlement a victory for its 1.5 million members and all UnitedHealth shareholders.

"This precedent-setting recovery demonstrates that the company's true owners -- share owners -- will hold CEOs accountable for disregarding principled corporate governance," said Peter Mixon, CalPERS general counsel.

UnitedHealth is not directly involved in Wednesday's settlement, and the company had no comment.

A signal to boards, execs

The pay-outs from McGuire and Lubben were the final pieces to fall in place in the CalPERS settlement. Otherwise, the case was scheduled for trial this month.

Lawyers not involved in the case said the $30 million is the biggest personal payment seen in an options backdating lawsuit brought by shareholders.

"Normally, this sort of lawsuit would be settled by the company except in cases of fraud, stealing or insider trading. The fact that there's a personal payment from a high-level executive and the fact that the payment is huge is compelling," said Elizabeth Nowicki, a law professor at Tulane University who has been an expert witness on other backdating cases.

"This is a signal to both boards and executives somehow implicated that this is not going to be easy sledding," added Nowicki. "This is a wake-up alarm to be ready to make reasonable settlements."

McGuire, who over 17 years at UnitedHealth built it into the biggest health insurance company in America with more than $70 billion in revenue, stepped down in late 2006 after an internal investigation found that options had likely been backdated.

McGuire still owns about 28 million UnitedHealth shares and options, according to a company filing in April 2007. It's difficult to calculate how much those are worth because the options have varying exercise prices and expiration dates.

McGuire's options were frozen by U.S. District Judge James Rosenbaum in Minneapolis during pre-trial proceedings. The settlements are now subject to approval by Rosenbaum.

Since leaving UnitedHealth, McGuire has continued to live in the Twin Cities. In recent months, according to his statement Wednesday, he has continued to work on philanthropic and health care endeavors.

Lubben is retired and living in Minnesota.

Staff writer Patrick Kennedy contributed to this report. Chen May Yee • 612-673-7434