$400 million UnitedHealth settlement gives forlorn class of lawsuits new luster

By: JOSHUA FREED - Associated Press | Sunday, December 9, 2007 7:40 PM PST ∞

MINNEAPOLIS -- An obscure class of lawsuits in which shareholders sue on behalf of their company used to get little respect. But that may change now that one of those lawsuits wrestled an eye-popping sum of more than $400 million from former UnitedHealth chairman and CEO William McGuire.

It's believed to be the largest recovery in a so-called derivative case.

"These things are damn near impossible to get anywhere with. If one does get somewhere, that's a noteworthy event in itself," said Vernon J. Vander Weide, the lead attorney on the state derivative lawsuit that settled along with the federal one Thursday.

Vander Weide said he's seen about a half dozen of his derivative cases thrown out for one reason or another over the past nine years, often after the company resisted. In one of those cases, he sued the former Green Tree Financial over its CEO's more than $150 million in compensation from 1995 to 1997. The case was thrown out in 2000.

At UnitedHealth Group Inc., shareholders sued in 2006 alleging that McGuire, who was then chairman and CEO, and several other directors and officers had failed to fulfill their fiduciary duties by allowing McGuire to pick the dates for his stock options after the fact. That would have given him the ability to pick the best possible price for his options, creating legal and accounting problems and costing shareholders more.

A "special litigation committee" of two former state Supreme Court justices spent more than a year investigating and conducted 50 interviews. Attorneys for the committee and the plaintiffs both said UnitedHealth cooperated in the process, and new CEO Stephen Hemsley was among those interviewed.

McGuire eventually agreed to return $320 million in stock options and forgo more than $99 million in other retirement and executive savings benefits in a settlement announced Thursday. A previously announced repricing of stock options cost him another $189 million, and givebacks and repricings by other executives, some of them previously announced, push the total to more than $900 million.

Such cases have often taken a back seat to shareholder class-action lawsuits. Courts have approved settlements of $7.23 billion stemming from the scandal-tainted collapse of Enron and almost $6.16 billion from WorldCom, according to RiskMetrics Group. Much of that money came from banks and former executives.

In a derivative case, settlements often come executives or board members who are found to have failed to look out for shareholder's interests. The money goes back to the company.

In one derivative case, board members of Hollinger International Inc., which publishes the Chicago Sun-Times, agreed to pay the company $50 million in 2005 to settle a lawsuit that accused the directors of lax oversight for approving transactions involving the sale of newspaper operations for as little as $1. Insurance covered that settlement.

And in 2005, Oracle Corp. CEO Larry Ellison settled a derivative case for $122 million of his own money after he was accused of selling some of his Oracle shares shortly before they plummeted in value in 2001.

McGuire's payment will also come out of his own pocket.

But still, the size of the settlement will get the attention of insurers who cover corporate directors and officers, said Kevin M. LaCroix of OakBridge Insurance Services, which helps insurance brokers sell special policies for directors and officers.

The Hollinger, Oracle, and UnitedHealth settlements will focus insurers much more on the threat of derivative lawsuits, he said.

"In the past, carriers really didn't take derivative lawsuits quite as seriously as class action lawsuits, because the dollars involved were more serious," he said. "Now they will have to pay attention."

He said more than 160 lawsuits have been filed over stock options backdating.

While many previous derivative cases settled for the cost of attorneys fees and some corporate governance reforms, cases over options backdating can involve much larger figures, said Steve Shappell, managing director of financial service group legal and claim practices at insurance brokerage and consultant Aon Corp.

"These backdating cases have heightened the risk that there could be substantial numbers involved," he said.