The Ohio Public Employees' Retirement System and Ohio State Teachers' Retirement System, both of Columbus, filed a federal lawsuit against 13 current and former directors of UnitedHealth Group Inc., Minnetonka, Minn., challenging the company's $1.2 billion in options grants to William McGuire, chairman and CEO.
The suit, filed Monday as a class action in U.S. District Court in Minneapolis, claims UnitedHealth's board "completely abdicated their fiduciary responsibilities, and lied to UnitedHealth's public shareholders, by permitting" Mr. McGuire "to dictate his own compensation through the nefarious manipulation of the company's stock-option plans."
As a result, Mr. McGuire was allowed to "improperly and unlawfully amass a fortune in UnitedHealth stock options, currently valued at approximately $1.2 billion, and has caused the company to overstate its earnings and issue materially false and misleading financial statements since 1997," the 95-page complaint states.
The board permitted Mr. McGuire "to effectively set the ‘strike price' — i.e., the price at which an option to purchase stock can be exercised — for stock options granted," the suit adds.
Walter F. Mondale, former U.S. vice president; Thomas H. Kean, former New Jersey governor and chairman of the 9/11 commission; and Donna E. Shalala, president of University of Miami and former U.S. secretary of Health and Human Services, are among the defendants, in addition to Mr. McGuire and Stephen J. Hemsley, president and COO of UnitedHealth. Mr. Kean and Ms. Shalala currently are directors; Mr. Mondale, a board member from 1997 to 2002, is the only former director named in the suit, which alleges that the improper option practices date to 1996.
"Regardless of the success achieved by Dr. McGuire in turning UnitedHealth Group into one of the country's leading health-care providers, this case exposes an egregious abuse of executive compensation," Jay W. Eisenhofer, managing partner, Grant & Eisenhofer, the law firm representing the pension funds.
On May 17, UnitedHealth announced the U.S. Department of Justice and IRS are investigating its stock options.
The $73 billion Ohio PERS and $53 billion Ohio teachers' fund — which own 3.5 million shares and 2.1 million shares of UnitedHealth stock, respectively — seek restitution of all profits Messrs. McGuire and Hemsley made from improperly priced options and award of compensatory and punitive damages to plaintiffs. No amounts were stated in the complaint.
John Penshorn, senior vice president and media contact, UnitedHealth Group, didn't respond to requests for comment.