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CalPERS Seeks Probe of PacifiCare

The pension fund questions the timing of a decision to boost executive payouts in the event of the firm's sale.

November 15, 2005|Debora Vrana | Times Staff Writer

California's influential public pension system raised new complaints Monday about the pending acquisition of Cypress-based health insurer PacifiCare Health Systems Inc. and said it would ask the state attorney general to investigate possible improprieties in the deal.

Directors of the California Public Employees' Retirement System, which has a reputation as a corporate-governance watchdog, said they were concerned by the timing of a decision in May by PacifiCare's board to boost payouts that executives would get if the company was sold.

At the time of the board decision, PacifiCare had been talking for five months with UnitedHealth Group Inc., the nation's second-largest health insurer, about a possible purchase. The $8.1-billion deal was announced seven weeks after the compensation change.

"This all raises questions about conflict of interest and breach of fiduciary duty," said Dennis Johnson, a senior portfolio manager at CalPERS.

CalPERS, the nation's largest public pension fund, owns $33 million worth of shares in PacifiCare and $400 million worth in Minnetonka, Minn.-based UnitedHealth.

The pension fund said it would ask California Atty. Gen. Bill Lockyer to look into the timing of the $345-million executive pay packages, which include immediate vesting of previously granted PacifiCare stock options and additional incentive payments to executives who stay with the combined company.

The CalPERS board, already on record as opposing the executive payouts, also voted Monday to contest the purchase unless the compensation was put to a separate shareholder vote.

PacifiCare executives said they were confident that the deal would withstand scrutiny and be approved by shareholders in a vote scheduled for Thursday. The company said it would not hold a separate vote on the executive pay issue.

"We will answer any questions they might have," said Tyler Mason, a spokesman for PacifiCare. "We will continue to conduct ourselves with full transparency."

The pay packages also have drawn criticism from two elected state officials who are running for governor next year: state Treasurer Phil Angelides and state Controller Steve Westly.

On Monday, Angelides criticized the lack of disclosure to investors.

"They hid the ball here and that's not right," he said. "CalPERS had no choice but to stand up and say this is wrong."

A CalPERS staff memo, citing information in PacifiCare's proxy statement, disclosed the timing of the May 19 PacifiCare board vote.

Typically a board would know whether high-level merger talks had been occurring for months, said David Leach of Executive Compensation Group, a consulting firm in Los Angeles.

"It raises a red flag," Leach said. "There is an appearance of conflict of interest here. Anything done within a year of a change of control raises questions."

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