Two Ohio pension funds filed a shareholder lawsuit against UnitedHealth Group, Minneapolis, for allegedly allowing its chairman and chief executive officer, William McGuire, to dictate his own compensation through the "secret manipulation" of stock-option grants over the past decade. The lawsuit was filed in U.S. District Court in Minnesota by the Ohio Public Employees' Retirement System and the State Teachers' Retirement System of Ohio, which hold 5 million shares of UnitedHealth stock combined. Other institutional investors are expected to join the action, the plaintiffs' attorneys said. The lawsuit claims that UnitedHealth's directors breached their fiduciary duty and misled shareholders by allowing McGuire and other executives to set the grant dates of their stock options, often retroactively, in order to maximize the options' value when exercised later. At Dec. 31, 2005, McGuire held $1.6 billion in unexercised options. Earlier this month, the insurer announced that it was restating up to $286 million in net income for the past three years because of errors in its reporting of option grants to regulators. UnitedHealth has lost more than $16 billion of its market value since mid-March.
The pension funds are seeking compensatory and punitive damages and have asked the judge to freeze all unexercised stock options held by McGuire and UnitedHealth President and Chief Operating Officer Stephen Hemsley. The federal lawsuit is at least the second to be filed against UnitedHealth since last week, when the insurer acknowledged that it was among several companies under investigation by the Justice Department and the Internal Revenue Service for possible stock-option abuses. On Monday, UnitedHealth was sued on behalf of five public pension funds in Florida, Louisiana, Minnesota and Mississippi. -- by Laura B. Benko