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CalPERS to Collect in Stock-Option Settlement

July 3, 2008
Jon Ortiz
© 2008 Sacramento Bee

Sure, the money's nice, but Wednesday's class action settlement between the California Public Employees' Retirement System and UnitedHealth Group Inc. did more than put a record $895 million dent in the wallet of the nation's No. 2 health insurer.

It sent a message to other publicly held companies: Don't mess with the numbers.

CalPERS and the Alaska Plumbing and Pipefitting Industry Pension Trust were the lead plaintiffs in the lawsuit alleging that UnitedHealth manipulated executive stock options to inflate their value.

CalPERS claimed it lost millions on its investments in the company's stock because of the manipulations. Fund officials on Wednesday didn't know how much money CalPERS will get from the settlement.

But beyond the eventual payout, Minneapolis-based UnitedHealth agreed to several key changes to how it runs its business. Experts say that those changes burnish CalPERS' image as a crusader for better corporate governance, the nuts-and-bolts of how public companies fulfill their duties to investors and other stakeholders.

"In a sense, CalPERS is acting like an attorney general for its members and this is a warning shot to other companies that engaged in this behavior or are inclined to," said Carl Tobias, a University of Richmond, Virginia, law professor who follows class action suits. "People who rely on CalPERS need to understand that it has acted very aggressively here to protect their interests."

Stock options give recipients rights to buy company shares at a set price, usually the closing share price on the date a grant is made. Backdating shifts the price-setting date back to a stock's lower point, creating an instant windfall for the buyer.

Dozens of backdating scandals have triggered civil and criminal investigations, compelled more than 80 financial restatements and forced out dozens of executives. Former UnitedHealth CEO Bill McGuire stepped down last year after he allegedly amassed $1.6 billion in backdated stock options.

The practice, CalPERS claimed, cost it up to $22 million on its investments in UnitedHealth stock – about 6.7 million shares worth about $322 million at the time. The fund now holds 4.9 million UnitedHealth shares valued at about $127 million.

The agreement doesn't require UnitedHealth, with $75.5 billion in revenue last year, to admit wrongdoing. The terms add new company governance rules, including a shareowner-nominated director to its board, enhanced standards for director independence and shareholder power to approve stock option repricing. Executive pay incentives will factor in UnitedHealth's performance compared with that of similar insurers.

CalPERS general counsel Peter Mixon called the reforms "a major step forward" in its campaign to hold directors accountable.

Thomas Strickland, UnitedHealth's chief legal officer, said the settlement "resolves a major issue before our company" during a difficult time for the business. On Wednesday it slashed its annual earnings outlook and said it would cut 4,000 jobs because of tough competition in the industry.

UnitedHealth's payout will dwarf the settlements reached in 11 similar class action lawsuits so far. Those agreements have totaled $418 million, according to RiskMetrics Group, a New York City-based firm that tracks securities class action lawsuits. The average settlement has been $38 million.

"It's a very substantial amount of money," said Tobias, the law professor. "It seems clear that there was backdating going on. That's why people settle cases."

Ramzi Abadou, CalPERS' lead attorney, said the fund's piece of the settlement will be based on the number of UnitedHealth shares it owned during the period cited in the litigation, Jan. 20, 2005, through May 17, 2006.

"I can't comment on the exact amount, but the formula is the same for all the shareholders," said Abadou, who works in the San Diego offices of Coughlin Stoia Geller Rudman & Robbins LLP. The amount of money paid to each shareholder will depend on how many make a claim to the settlement.

The deal won't be final until the CalPERS board of administration, the UnitedHealth Group board of directors and the U.S. District Court in Minnesota approve it. The terms cover all parties except former CEO McGuire and UnitedHealth's former general counsel, David Lubben, who remain defendants in the class action.

CalPERS, the nation's largest public pension fund with about $235 billion in assets, provides retirement and health benefits to approximately 1.5 million public employees, retirees and their families.

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