Stock option problems magnifying financial troubles for United

Top executives return options that the company acknowledged were bloated by manipulating the date of their receipt. Meanwhile, United will restate past earnings.

By Jonathan G. Bethely, AMNews staff. Nov. 27, 2006.

Fallout from UnitedHealth Group's issuance of stock options in a process known as backdating is hitting the health plan's two top executives, as well as the company's bottom line, after an internal review of the company's options-granting policies.

Outgoing Chair and CEO William McGuire, MD, agreed to forfeit nearly $200 million in stock options already exercised linked to the backdating. He said he would step down Dec. 1. President and Chief Operating Officer Stephen Hemsley, who is also linked to the stock-options probe, is slated to succeed Dr. McGuire as CEO.

Hemsley said he would reduce his past stock compensation by $190 million in both unrealized gains and money he would return. "My decision is in keeping with my personal goal of avoiding even the appearance of any unintended benefit from any past option grants to me," he said in a prepared statement.

In each case, the dollar figure represents the amount of money lost by United repricing the executives' options, awarded between 1994 to 2002. In the process of backdating, the options price -- called a strike price -- is set at the company's lowest stock price of the year, instead of the stock price the date the options were awarded -- thus allowing executives to buy company stock at a deep discount.

Now, United is repricing those options so that their strike price equals the company's highest stock price of the year the options were awarded. That still leaves Dr. McGuire with about $1.6 billion worth of options, which United says were not backdated.