The report found many stock option grants were backdated, including those given to CEO Bill McGuire and even new hires. Backdating gave the recipients a head start on making a profit from the options.
The report also found there was a doubling up of stock options grants given to some of the company's officers and employees in 1999. The document says UnitedHealth replaced about two million stock options -- including 750,000 of McGuire's options -- that had become worthless when the company's share price dipped. The report found the replacement was intended to address employee morale and retention. The earlier grant was suspended, but then reinstated months later after the formerly worthless options became valuable.
Finance Professor Randy Heron at Indiana University did some of the early research that raised concerns about backdating. Heron says he found what he calls the double dipping startling, and says it's hard to believe the beneficiaries didn't know what was going on.
"If I get an additional grant of options, and I keep my old ones at the same time, and they're priced even more favorably, I'm understanding that I'm getting some benefits there that I shouldn't be receiving," he says. "So I think that's really problematic. I think it's going to create problems far beyond the backdating to increase their compensation."
Heron says, in the course of litigation against the company by parties like shareholders or the Department of Justice, lawyers will probably ask judges to strike down the additional grants so McGuire and other recipients don't benefit from them. A UnitedHealth spokesman declined to comment on the issue and whether it was improper, saying the matter is currently under review.
The company has indicated that Bill McGuire, who has stepped down as CEO, has agreed to a repricing of any backdated stock options to minimize his benefit. So has his successor, Stephen Hemsley.
If I get an additional grant of options, and I keep my old ones at the same time, and they're priced even more favorably, I'm understanding that I'm getting some benefits there that I shouldn't be receiving.Randy Heron
But other aspects of McGuire's compensation are also drawing scrutiny because of the report. The document outlines a potential conflict of interest on the executive compensation committee. The report says the chair of the committee, William Spears, acted as an investment manager for some of McGuire's family assets. And McGuire once invested in Spears' company.
Broc Romanek, editor of CompensationStandards.com and a former Securities and Exchange Commission lawyer, says Spears' personal relationship to McGuire could draw legal fire.
"The lawyers that sue companies, when they do sue for excessive compensation, they focus on the independence of directors first," he says.
Romanek thinks McGuire's severance could be subject to change, given potential questions about the whether conflict of interest affected McGuire's pay. A company spokesman would not address McGuire's severance but deferred to a news release that says the terms of McGuire's departure are under negotiation. According to the company's SEC filings, McGuire is currently entitled to a lump-sum payout of about $6 million and a retirement benefit of about $5 million annually.
As far as McGuire's legal fate goes, Romanek doesn't think anything that's come to light about McGuire's conduct so far is enough to land him in jail. But he says if the government pursues any criminal charges, it's more likely to do so against individuals at UnitedHealth than the company as a whole.
"After Arthur Andersen got driven into the ground, and subsequently the Supreme Court found they probably shouldn't have been given the death sentence, the Department of Justice and Attorney General's office are going to be much more loathe to bring an action against a particular institution, because a public company in theory, it should go on forever, and it's not the company itself that committed these acts, it was individuals within the company."
And UnitedHealth is the subject of a number of investigations that could potentially lead to civil or criminal charges.
Jacob Frenkel, a lawyer who used to work for the SEC and as a federal prosecutor, says the difference between civil and criminal charges hinges on whether criminal intent was involved. He says this will be a big question in any case involving UnitedHealth.
"If their actions were based on gross negligence, that in and of itself would warrant charging them civilly. If on the other hand, they acted with criminal intent, in other words, intent to defraud, and in addition to that, you had others who chose to remain deliberately ignorant, those become grounds for bringing criminal charges."
A UnitedHealth spokesman says he's unaware of any aspect of the company's actions that would merit criminal charges. Frenkel says only when the SEC and the Justice Department conduct their investigations will it be clear what kind of charges can be made.