In re UnitedHealth Grp. Inc. PSLRA Litig.

Largest Recovery Arising Out of Options Backdating Scandal

On July 1, 2008, California Public Employees’ Retirement System (“CalPERS”) and Alaska Plumbing and Pipefitting Industry Pension Trust (“Alaska”) announced a settlement with UnitedHealth Group Inc. and certain individual defendants for a record-breaking $895 million. Just over two months later, a settlement was also reached with the two remaining defendants – bringing the total recovery for the class to over $925 million.

In addition to the monetary recovery, UnitedHealth also made critical changes to a number of its corporate governance policies, including electing a shareholder-nominated member to the company’s Board of Directors. Other key corporate governance changes included (i) enhanced standards for director independence; (ii) a mandatory holding period for options issued to executives; (iii) a shareholder approval requirement for any stock options re-pricing; and (iv) a peer group comparison requirement when establishing incentive compensation.

Since March 2006, when The Wall Street Journal published its Pulitzer Prize-winning article “The Perfect Payday,” UnitedHealth’s stock options backdating practices have been scrutinized by journalists, academics and numerous government agencies.

The Wall Street Journal identified UnitedHealth as a company with “wildly improbable option-grant patterns.” By April 2006, the SEC had begun an informal inquiry prompting UnitedHealth to initiate an independent investigation into its own historical stock options granting practices.

After being selected as lead plaintiff, CalPERS filed a consolidated complaint in December 2006. Chief Judge James M. Rosenbaum denied defendants’ motions to dismiss the consolidated complaint in their entirety, and compared defendants’ scheme to the movie The Sting, a story about “‘past-posting,’ or betting on horse races after the results are known.”

During the discovery process, Robbins Geller attorneys carefully scoured more than 22 million pages of documents obtained from defendants, as well as hundreds of thousands of additional documents from more than 15 third parties.

The team delved into the company’s documents and internal correspondence, uncovering UnitedHealth’s pervasive options backdating scheme. Robbins Geller attorneys also collectively took more than 50 depositions and engaged in significant motion practice in the months leading up to the close of discovery. Plaintiffs’ success on these fronts was resounding.

Although accounting issues concerning stock options grants are complex, the documents and testimony plaintiffs acquired during discovery established a strong case regarding liability. Regardless, plaintiffs faced significant legal hurdles to show loss causation – that the actions of defendants were responsible for causing the stock losses – as well as damages. Determined to find the pressure points that could lead to settlement, plaintiffs pursued two separate discovery matters, which ultimately forced the company’s hand.

First, plaintiffs moved to compel defendants to produce documents compiled and drafted by the company’s outside counsel during the course of its independent investigation – documents the court had previously determined were protected by the work product doctrine. At the hearing on the motion, Magistrate Judge Franklin L. Noel cautioned plaintiffs’ counsel, “I think I [previously] . . . thought about this . . . [y]ou are certainly free to try to change my mind.” A combination of novel legal argument, defendants’ own documents, and testimony did just that. On June 4, 2008, Magistrate Judge Noel ordered that defendants produce the previously withheld documents to plaintiffs.

Next, plaintiffs moved the court to unseal the record and publicly expose the company’s fraudulent options practices. The court ordered that certain previously redacted facts and evidence revealing the true scope of defendants’ fraud be made available to the public.

With a court order requiring UnitedHealth to produce documents defendants considered to be work product, and the knowledge that devastating information would be made available for all the world to see, plaintiffs gave defendants no choice but to come to the bargaining table and resolve the case.

Shortly after reaching the $895 million settlement with the company, the remaining defendants, former CEO William W. McGuire and former General Counsel and Corporate Secretary David J. Lubben, also settled. McGuire paid $30 million and returned stock options representing more than 3 million shares to shareholders, while Lubben paid an additional $500,000 to shareholders. The size of McGuire’s settlement is “pretty amazing,” according to Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Elson added that the settlement with McGuire is a “significant accomplishment” that “doesn’t happen very often.”

Overcoming serious obstacles, CalPERS and Alaska have recovered an unprecedented settlement for shareholders and additional corporate governance measures that will ensure greater oversight in executive compensation in the future. The case is monumental for shareholders seeking to recover losses sustained as a result of improper accounting for backdated stock options and is the largest recovery in a securities class action in the Eighth Circuit.

In re UnitedHealth Grp. Inc. PSLRA Litig., No. 06-CV-1691 (D. Minn.).