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CEO's Departure Won't Cure Firm

Governance issues are likely to plague insurer UnitedHealth after a scandal over the backdating of options.

October 17, 2006|From Reuters

NEW YORK — UnitedHealth Group Inc. Chief Executive William McGuire is leaving, but the scandal over the backdating of options at the insurer persists.

His successor, Stephen Hemsley, will have to deal with issues including federal investigations, shareholder lawsuits and possible restatements of financial results after a damning report by the company's independent counsel, analysts said.

And there is still concern over Hemsley's role in the option grants, even though it was described as limited in the report that led to the corporate governance overhaul that included the CEO change.

He also must oversee a departure package for his old boss, which could be controversial and keep the company in the news.

"I don't think it's necessarily over," said David Heupel, a portfolio manager with Thrivent Investment Management. "You've got a number of regulatory agencies looking at them.... It's not as if today is the last day we're going to hear about this."

Shares of Minnetonka, Minn.-based UnitedHealth, the largest U.S. health insurer by market value, fell 2.5% on Monday, the day after the announcement that McGuire would leave by Dec. 1. They are off 23% this year, weighed down by uncertainty about the company's prospects.

UnitedHealth still faces investigations by the Securities and Exchange Commission and Justice Department as well as the Minnesota attorney general.

CRT Capital Group analyst Sheryl Skolnick said Hemsley's first priority must be to ensure that the company avoided federal criminal prosecution, which could cripple its ability to offer Medicare and Medicaid plans.

UnitedHealth is better positioned to defend itself after the changes, said Thomas Dewey of law firm Dewey Pegno & Kramarsky, which specializes in corporate governance.

Dewey said the report and the structural changes would "enable the company to go to the regulators and say, 'We did a thorough, independent investigation.' "

"I think the company, like many of the companies that have issues related to options backdating, is much more concerned about the government investigations than about the private civil litigation," Dewey said.

UnitedHealth said Sunday that it would probably delay its third-quarter SEC filing and had not yet determined whether it would make any restatements.

"The fundamentals are probably OK," Skolnick said. "But there are going to be changes here, and we don't know what the magnitude of the changes are."

Analysts expressed relief that UnitedHealth tapped Hemsley, the chief operating officer and president, to replace McGuire, 58. Hemsley, 54, is seen as "one of the best operators in the industry," Merrill Lynch analyst Douglas Simpson wrote.

Hemsley had amassed $660 million in options by the end of 2005. Although much of the independent report centered on McGuire's role in dispensing option grants, it said Hemsley played a "more limited role in the option granting process."

Karl Cambronne, whose law firm was named lead counsel in a shareholder suit against UnitedHealth, said about Hemsley: "Here is a guy that has the second-most-tarnished group of options and that are jaw-dropping in amount, and the result of it is he gets a promotion. What's wrong with this picture here? The report seems to suggest that he didn't know a lot about it. Well, if he didn't, he should have."

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