Judge tests his authority in McGuire settlement

A landmark settlement between UnitedHealth Group Inc. and its former chief executive, William McGuire, may be delayed or possibly derailed after a federal judge asked if he could review its merits.

In an unexpected move, U.S. District Judge James Rosenbaum asked the Minnesota Supreme Court to clarify whether state law allows him to review a record $420 million settlement brokered earlier this month. His ruling, filed late Wednesday, also maintains a freeze on McGuire's $874 million in remaining stock options.

Rosenbaum is required to approve any settlement as a matter of course. But the fact that he is seeking guidance from the Minnesota court on how far he can go in reviewing it is unusual.

"This was not anticipated by anybody in this litigation," said Karl Cambronne, lead attorney in the consolidated shareholder lawsuits against UnitedHealth, which was part of the settlement. "The judge is trying to see to what extent he can peel back the onion and see if there was an arm's-length resolution."

In the deal announced Dec. 6, McGuire is required to surrender $420 million in stock options and other benefits he got while running America's biggest health insurer. That was in addition to $198 million he gave up after his options were repriced last year.

McGuire also agreed to pay a record $7 million fine to the Securities and Exchange Commission (SEC) to settle an investigation into charges that he misled investors by improperly pricing his options and those of other top executives to maximize gains.

That would still leave him with $874 million in stock options, which remain frozen as the California Public Employees' Retirement System (CalPERS) continues to pursue its own lawsuit against UnitedHealth.

The blockbuster settlement was regarded by many as a done deal until the judge's unexpected move Wednesday.

"There are a host of questions arising now that have to be grappled with," said Vernon Vander Weide, counsel in one of the tentatively settled cases against UnitedHealth. "We're hopeful the process will go forward and we'll satisfy the judge in what he needs." Vander Weide estimated it could take up to a year for Rosenbaum to get his answer from the Minnesota Supreme Court.

UnitedHealth spokesman Don Nathan said the company was "analyzing the opinion."

The settlement came after a "special litigation committee" (SLC) appointed by UnitedHealth, consisting of former Minnesota Supreme Court justices Kathleen Blatz and Edward Stringer, issued its report. Such special committees are formed to advise a company on its legal options.

"A lot of the time, SLCs have been [viewed as] the fox protecting the chicken coop," Cambronne said. "But this SLC is very active and thorough" and involved plaintiffs' attorneys throughout the process, Cambronne said.

After the settlement was announced, the CalPERS, which holds UnitedHealth shares, asked the court to keep McGuire's remaining options frozen. CalPERS was not a party to the settlement.

McGuire countered that he wanted the money -- frozen since November 2006 -- so he could pursue charitable and business interests.

"CalPERS has clearly shown a significant probability of success on the merits in [its] litigation," Rosenbaum wrote Wednesday. "The court will release funds as necessary to prevent hardship to Dr. McGuire."

Andrew Brown, an attorney for CalPERS, said it was "a positive step in that it keeps McGuire from getting his hands on the options."

Judge asking 'for insight'

Rosenbaum can examine and possibly modify the settlement, said Christopher Bebel, a former federal prosecutor who is now a securities law litigator in Houston.

Federal courts have the power to apply state as well as federal law, but they must follow the lead of the state authority, in this case the Minnesota Supreme Court, said Bebel, who is not involved in the UnitedHealth case.

"Rosenbaum, courteously, is asking for insight ... so as to heighten the likelihood that any decision he makes will not be reversed on appeal," Bebel said. "Judge Rosenbaum also is clearly, while making the certification to the Supreme Court, implicitly telling the parties to revisit the terms that were previously agreed upon and [to possibly] sweeten the pot."

In his written opinion, Rosenbaum raised questions about the SLC report. The committee apparently made a business judgment in settling with McGuire, he wrote, but "its lack of any findings leaves no tracks showing why or how its business judgment can be considered reasonable."

While the judge noted that he had not yet been asked to approve the settlement, unfreezing McGuire's assets now would make such an approval "an empty act," he added.

"If [CalPERS'] allegations prove true ... Dr. McGuire may be personally liable for some extraordinarily substantial sums," he wrote.

Chen May Yee • 612-673-7434 Neal St. Anthony contributed to this report.