Former CEO Coughs Up Record Payout
The former CEO of one of the nation's largest health insurers agreed Wednesday to pay $30 million and to forfeit 3.7 million unexercised stock options in what likely marks the largest cash payout by an individual to settle securities fraud claims with shareholders. William McGuire stepped down as chairman and CEO of UnitedHealth Group in 2007, following revelations he had received millions of backdated stock options from 1994 to 2006.
In July, San Diego's Coughlin Stoia Geller Rudman & Robbins negotiated an $895 million settlement with UnitedHealth in the same case. However, the company did not release McGuire or the former general counsel from liability, and the firm continued to pursue a settlement with them. The combined sum now dwarfs the monetary size of every other stock options settlement, and marks a rare instance of an individual paying cash to settle a shareholder lawsuit.
"Plaintiff attorneys are interested in maximizing the aggregate settlement" and not extracting payments from individuals, said John Coffee, a professor at Columbia University School of Law in New York. "You could say that's a weakness, but that's the economic incentive."
Plaintiffs' attorneys typically receive between 10 to 30 percent of the total sum recovered in private securities litigation. As a result, they remain tightly focused on the total recovery size.
Because the companies often rely on their directors and officers insurance to pay for settlements, critics say shareholder litigation fails to deter corporate fraud, Coffee said. The Securities and Exchange Commission usually extracts large settlements from individuals as part of its mission to deter corporate fraud.
Last December, McGuire settled with the SEC by paying a $7 million fine and reimbursing UnitedHealth for about $420 million in cash bonuses, unexercised options and profits from stock sales.
McGuire's attorney, Steven Gaskins of Flynn, Gaskins & Bennet in Minneapolis, released a statement in which his client denied any wrongdoing.
"I am pleased to be able to help bring the stock option dating issues closer to complete resolution," McGuire said in the statement.
A federal criminal investigation into the matter remains open. In March 2007, UnitedHealth announced a $1.5 billion restatement to its past earnings as a result of backdated stock options grants dating to 1994.
David Lubben, former general counsel at UnitedHealth also agreed Wednesday to pay $500,000 to settle claims against him. His attorney, Seth Levine of Foley & Lardner in New York, said Lubben "is pleased to have resolved the matter subject to court approval."
Coughlin Stoia lawyers had reeled in a historic victory Monday when a federal judge in Houston approved the firm's $688 million fee application as lead counsel in the Enron shareholder litigation. It is believed to be the largest ever attorney fee awarded in a securities suit.
The settlements in the UnitedHealth securities class-action now total about $925 million, more than five times higher than the $160 million obtained by shareholders in the Brocade stock options backdating case.
The $30 million payment also stands out as the largest cash payment ever made by an individual in a securities fraud suit, according to CalPERS and other lawyers. The shareholder litigation stemming from the collapse of Enron and Worldcom also led to large cash settlements with individuals. None came close to the size of McGuire's contribution.
In Enron, 10 directors paid a total of $13 million. In Worldcom, former CEO Bernie Ebbers paid $5.6 million but also forfeited nearly $28 million in other assets by some estimates. In both cases, Coffee said executives had few assets by the time shareholder litigation began.