The Securities and Exchange Commission has settled enforcement actions against UnitedHealth Group Inc., a Minnetonka, Minn., health insurance company, and separately charged former UnitedHealth General Counsel David J. Lubben.
SEC alleges that UnitedHealth was engaged in a scheme to backdate stock options. Without admitting or denying the allegations, UnitedHealth agreed to settle charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws. Lubben is blamed for participating in the stock option backdating scheme.
Without admitting or denying the allegations, Lubben consented to, among other things, an antifraud injunction, a $575,000 penalty, and a five-year officer and director bar. According to the Commission’s complaint, Lubben or others acting at his direction created false or misleading company records indicating that the grants had occurred on dates when the company’s stock price had been at a low.
Lubben personally received numerous backdated grants of options, representing as many as 3.8 million shares of UnitedHealth stock on a split adjusted basis. He exercised approximately 1.8 million of those options for approximately $1.1 million in gains attributable to improper backdating.
SEC alleges that certain UnitedHealth officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date. The backdated grants resulted in materially misleading disclosures, with the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion.
The Commission declined to charge the company with fraud or seek a monetary penalty, based on the company’s extraordinary cooperation in the Commission’s investigation, as well as its extensive remedial measures. UnitedHealth’s cooperation included an independent internal investigation, the company’s release in a Form 8-K of a report detailing the investigation’s findings and conclusions, and the sharing of the facts uncovered in the internal investigation with the government.
The company also took significant remedial actions in response to the findings of its internal investigation, including the implementation of new controls designed to prevent the recurrence of fraudulent conduct, removal of certain senior executives and board members, and the recoupment of nearly $1.8 billion in cash, options value and other benefits from several former and current officers, through, among other things, derivative litigation and the voluntary re-pricing and cancellation of retroactively-priced options.
The Commission alleges that between 1994 and 2005, UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.
Lubben consented to the entry of an order permanently enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, proxy statement, and securities ownership reporting provisions of the federal securities laws, and barring him from serving as an officer or director of a public company for a period of five years. Lubben will disgorge ill-gotten gains of $1,403,310 with $347,211 in prejudgment interest and pay a $575,000 penalty.
Under the terms of the settlement, Lubben’s disgorgement and prejudgment interest would be deemed satisfied by his voluntary repricing of his UnitedHealth stock options, which reduced the value of those options by approximately $2.7 million, and his payment of approximately $630,000 in pending settlements to resolve derivative and shareholder lawsuits related to options backdating filed against Lubben in state and federal courts in Minnesota.
In addition, Lubben agreed to resolve a separate administrative proceeding against him by consenting to a Commission order that suspends him from appearing or practicing before the Commission as an attorney for three years.
The Commission’s settlements with UnitedHealth and Lubben in the civil actions are subject to the approval of the U.S. District Court for the District of Minnesota.
“The Commission has filed fraud charges against UnitedHealth’s former CEO and General Counsel for their roles in the options backdating scheme, and today’s complaint against the company details the seriousness of UnitedHealth’s misconduct,” says Fredric D. Firestone, associate director in the SEC’s Division of Enforcement.”
“The settlement, however, takes into account the company’s extraordinary cooperation with the Commission’s staff’s investigation and the meaningful remedial efforts it has undertaken to recoup stock option value improperly given to former corporate executives and to improve its accounting controls and corporate governance policies.”
“UnitedHealth engaged in a long-running scheme to hide over a billion dollars in executive compensation. By materially misstating these expenses for over a decade, UnitedHealth breached its duty to shareholders to accurately report its financial results,” says Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.
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