Gopher State's Suit Galls UnitedHealth

Prosecutors in Minnesota expand an option-backdating case.
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has some more explaining to do.

The giant health insurer now stands accused of accelerating stock options in addition to backdating them. Minnesota prosecutors announced this week that they have broadened their investigation of the Minnetonka-based company and won court approval to move forward with their case.

The news comes as top executives at two more companies,

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, stepped down after being implicated in stock-options scandals of their own. Some worry that UnitedHealth's accomplished CEO, William McGuire, could join that exodus after the company wraps up an extensive investigation of its past stock-option grants.

In the meantime, the state is seeking to determine whether McGuire unfairly profited from his company's success in more ways than one.

"We're looking at three main things," said a spokeswoman for Minnesota Attorney General Mike Hatch. "The first is backdating. The second is CEO compensation. And the third is acceleration."

"While we respect the Court's decision, we continue to believe that the Attorney General is overstepping the limits of his investigative authority in this matter," the company said in an emailed statement. "UnitedHealth has been and is cooperating fully with the ongoing reviews by federal regulators who have jurisdiction and expertise concerning the issues in question and by the Independent Committee of the Board of Directors supported by outside counsel. The Company intends to appeal the Court's ruling."

By backdating some options and accelerating the vesting period for others, UnitedHealth could have made McGuire even richer than he would have otherwise been. McGuire regularly ranks among the best-paid CEOs in the country and, thanks to the value of his stock options, has become a billionaire on paper. He no longer accepts stock options from the company.

Still, UnitedHealth continues to come under fire for its past option grants. The company faces multiple investigations -- including one that it had attempted to block altogether.

In court filings, UnitedHealth argued that it would suffer "an undue burden" if forced to supply the information requested by Hatch's office. Specifically, the company claimed that the state's investigation would interfere with probes by three other parties -- the federal government and two committees appointed by its own board -- and should, therefore, be stopped. The company also complained about the "potential politicization of the options issue" which is being investigated by a state prosecutor who hopes to become Minnesota's next governor.

Nevertheless, the court rejected the company's arguments.

"UnitedHealth presented no evidence suggesting that it will suffer undue burden if the requested discovery is permitted," the court declared when denying the company's requests. "If a protective order is issued in this case, the protective order will act to suppress relevant and essential evidence -- which is exactly what is to be avoided."

Investors want answers instead.

By now, they have spent months waiting for the results of an internal probe being carried out by independent experts appointed by the company's board. They could hear something as early as next week, when the company releases its third-quarter results. But more likely, some feel, they will have to wait until the company's deadline for filing its 10-Q.

"That's Nov. 9," says Sheryl Skolnick, senior vice president of CRT Capital Group. "I think there's a remote chance that they will have anything material to report on the options situation next week -- very remote."

Thus, Skolnick plans to focus on the company's operational results instead.

Skolnick warns that UnitedHealth will probably report negative cash flow from operations for the quarter -- something "that never happens at this company." However, she blames the timing of certain Medicare payments instead of any deterioration in the company's fundamental performance.

Indeed, Skolnick expects UnitedHealth to meet Wall Street expectations with third-quarter earnings of 76 cents a share. She believes that strong cost management -- rather than big enrollment gains -- will continue to drive the company's margins higher.

"I think that's really where the company has excelled," she says. "There is a whole host of things that the company has been doing to aggressively contain costs, which is exactly what they should be doing. ... Volume discounts: That's what it's supposed to be all about."

Skolnick has a fair value rating on UnitedHealth's stock, which she plans to maintain until the company shares the long-awaited results of its internal options probe. The stock slipped 1% to $49.60 on Thursday.