The American Lawyer - February 2008

BIG
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Shareholder Derivative Litigation

In the biggest aftershock from the options backdating scandal so far, three former UnitedHealth Group Incorporated executives agreed in December to cough up at least $452 million to settle derivative and government civil claims. But if a district court judge is successful in his appeal to review the deal, settlement could be delayed or even blocked.

Among the settling executives is former chief executive William McGuire, who agreed to forfeit $420 million to the company. His total forfeiture, which inclues a previous repricing of options, is $618 million. Together, shareholder lawyers say, the UnitedHealth executives’ settlements dwarf the combined total settlements recovered by companies in previous backdating cases.

Without admitting to any charges, former CEO McGuire also agreed to pay a $7 million fine to the Securities and Exchange Commission in a separate civil suit. The fine is the first successful use by the SEC of the “clawback” provision of the Sarbanes-Oxley Act, which requires CEOs and CFOs of companies that restate earnings due to financial misconduct to return bonuses.

UnitedHealth came under scrutiny for backdating following an article in The Wall Street Journal in 2006. The SEC and the U.S. Department of Justice began probes in May 2006. The company, meanwhile, hired Wilmer Cutler Pickering Hale and Dorr to conduct an internal investigation.

The investigation, completed in October 2006, found evidence of widespread backdating and fingered McGuire as the principal culprit. That month, the Minnetonka, Minnesota–based health care company ousted McGuire, general counsel David Lubben, and director William Spears. UnitedHealth ultimately restated earnings by $1.5 billion and settled an Internal Revenue Service investigation for $55 million in March 2007.

By then, shareholders had already filed derivative suits, which were later consolidated. Settlement discussions commenced in July 2007, when the shareholders and former executives entered mediation. UnitedHealth’s board appointed two former Minnesota Supreme Court justices to a special litigation committee to represent the board in the discussions, and investors’ counsel worked closely with them to determine how much the former executives would return to the company.

In addition to McGuire’s large

payment, former GC Lubben agreed to pay $25.4 million to resolve derivative claims against him. (He previously voluntarily gave up $3.6 million through options repricing.) Spears agreed to have his settlement determined by an arbitration panel, which had not convened at press time.

The SEC, which was in its own discussions with McGuire, announced its fine separately that day, December 6. McGuire also agreed not to serve as an officer or director of a public company for ten years.

The settlements do not resolve a criminal investigation of McGuire and other former executives by the U.S. attorney’s office in Manhattan. The SEC said that its investigation into other UnitedHealth executives such as Spears and Lubben is also continuing.

In an order December 26, U.S. district court judge James Rosenbaum asked the Minnesota Supreme Court whether state law allows him to review the settlement. At press time no decision had been filed.

FOR PLAINTIFF THE UNITED STATES OF AMERICA IN-HOUSE: At the Minneapolis U.S. attorney’s office: assistant U.S. attorney Glen McGorty. At the Securities and Exchange Commission: senior deputy chief

litigation counsel Mark Adler, associate director division of enforcement Fredric Firestone, assistant direct of enforcement Gerald Hodgkins, branch chief Conway Dodge, Jr., and staff attorney David Neuman.

FOR PLAINTIFFS JAN BRANDIN AND PENSION FUND GROUP CHESTNUT & CAMBRONNE: Jeffrey Bores, Jack Chestnut, Karl Cambronne, and associates Bryan Bleichner, Stewart Loper, and Becky Erickson. (All are in Minneapolis.) Shapiro Haber & Urmy, a lead plaintiffs firm, tapped Cambronne as local counsel, but then Cambronne was appointed lead counsel. SHAPIRO HABER & URMY: Michelle Blauner, Edward Haber, and Thomas Shapiro. (All are in Boston.) The firm represented the first person to file a derivative suit, Jan Brandin. GRANT & EISENHOFER: Michael Barry, Cynthia Calder, Jay Eisenhofer, Stuart Grant, senior counsel Charles Caliendo, and associates Matt Hartman and Christine Mackintosh. (Caliendo is in New York; the rest are in Wilmington.) The firm represented the Connecticut Retirement Plans and Trust Funds and several Ohio public pension funds. BERNSTEIN LITOWITZ BERGER