Interested Parties
Sorting It Out at UnitedHealth

The board of UnitedHealth Group Inc. met on May 1 to deal with questions about unusually well-timed stock-option grants to top executives such as Chief Executive William McGuire. The gathering heard a briefing from a lawyer who was running UnitedHealth's internal probe of how the options were dated.

One director whose recollections would be important to the investigation was Thomas H. Kean, a former New Jersey governor who had served on the compensation committee that approved options grants.

The same day as the board meeting, some UnitedHealth directors and executives were supporting a campaign by Mr. Kean's son for a U.S. Senate seat from New Jersey. Some of them attended a fund-raiser for Tom Kean Jr. that day, in UnitedHealth's home state of Minnesota. It isn't clear whether Dr. McGuire and his wife attended, but each donated $2,000 to the cause. So did Richard T. Burke, who sits on a special board committee that is overseeing the options investigation. All told, UnitedHealth-affiliated donors have contributed $25,000 to the campaign.

The donations were just one instance of overlapping relationships and potential conflicts of interest that exist at some companies conducting investigations of their own stock-option practices. The various relationships don't necessarily mean board members can't be fully objective. But governance experts warn that, at the least, the ties are likely to hinder public confidence in the thoroughness of some of the inquiries.

These internal probes are important in the unfolding scandal over the dating of stock-option grants. Options are meant to pay off for an executive only if the stock price rises from its level when they are granted. If it is found that a company played around with grant dates so that options showed a paper profit from the start, the company may face a range of knotty problems, from allegations of false disclosure to the need to restate past financial results. In recent weeks former executives of two companies, Brocade Communications Systems Inc. and Comverse Technology Inc., have faced criminal charges.

With options under scrutiny at more than 80 companies so far, regulators and prosecutors haven't the resources to conduct full-blown forensic probes of every company. They often rely on companies' own internal inquiries to do the initial digging that helps authorities decide whom to pursue most vigorously. In addition, the companies themselves rely on these internal probes, either to show the public they've been diligent or to defend against shareholder suits.

In these probes, "if the government catches wind of issues affecting independence, they will naturally be more skeptical and less trusting of the process and the results," said W. Scott Sorrels, an Atlanta attorney who has conducted investigations for corporate boards in the past. Mr. Sorrels, not speaking of any particular firm, said: "We advise companies to avoid any appearance of impropriety so you don't have the situation blow up in your face six months down the road after the investigation is done."

At UnitedHealth, a spokeswoman said neither the company, directors nor executives would comment on potential conflicts of interest. Efforts to reach directors separately drew no response or were referred to the company. UnitedHealth has hired former Securities and Exchange Commission enforcement chief William McLucas to conduct the board probe.

When the donations to the Kean Senate campaign were described to former SEC Chairman Harvey Pitt, he said they struck him as "ill-advised and strange" and something that could be seen as an attempt to influence a witness because of the senior Mr. Kean's role on the compensation committee. A spokeswoman for the Kean campaign said the fund raising came at a "UnitedHealth breakfast" hosted by Minnesota Republican Sen. Norm Coleman, and there was absolutely no effort to curry favor with the elder Mr. Kean. The former New Jersey governor didn't return calls seeking comment.

UnitedHealth shows a variety of ties among directors or between directors and executives. One director is a trustee of a nonprofit to which Dr. McGuire and his wife gave $4 million from their family foundation, while another is a former head of that charity's board. Another director appears to manage money for the foundation, according to its tax filings. And Mr. Burke, who is on the special committee investigating options grants, was himself a member of the board committee that made options grants for a time in the early 1990s.

At Linear Technology Corp., some directors got options on the same beneficial dates as executives. Typically, directors' and executives' option grants occur on different cycles. Robert Swanson, Linear's chairman, said directors and executives receive options at pre-set cycles that sometimes coincide. A Louisiana pension fund that is suing Linear over its options-dating practices claims that directors can't fairly judge whether there was any impropriety because they got options on the same dates.

The suit, filed in state court in Santa Clara County, Calif., by Louisiana Municipal Police Employees' Retirement System, alleges that Linear sustained substantial harm because of the executive and directors' actions. Linear is a semiconductor company in Milpitas, Calif.

Mr. Swanson said two independent directors are overseeing the internal investigation. While acknowledging that the two probably received some of the option grants in question, he said the directors could fairly evaluate what happened. He said the facts would show there was no impropriety, adding that the board was "aware of everything we did. Nobody is having amnesia."

Mr. Swanson said that to assist the board, Linear is using one of its regular outside law firms, the prominent Silicon Valley firm of Wilson Sonsini Goodrich & Rosati. Some legal experts say a truly independent corporate probe would use a law firm with which the company has had no prior ties. Mr. Swanson said it would be "kind of an admission something's wrong if you have to go outside." A Wilson Sonsini spokeswoman said the firm isn't conducting an independent review but is representing Linear in its dealings with prosecutors, regulators and litigants.

At Affiliated Computer Services Inc., a technology outsourcer in Dallas, the board is probing a pattern of unusually well-timed options grants to former Chief Executive Jeffrey Rich and others. The grants allowed Mr. Rich to earn millions of dollars in profits. His grants often were dated just ahead of steep rises in the company's stock. A March analysis by The Wall Street Journal found that the likelihood of such propitious grant dates occurring by chance was approximately one in 300 billion. The grants are under scrutiny by federal authorities as well.

Whereas many companies mounting an internal probe ask a small committee of independent directors to oversee it, ACS has put its entire seven-member board in charge of the process, assisted by outside legal counsel. So the oversight group includes board Chairman Darwin Deason. Mr. Deason both received some of the options in question and had a role in their timing, the company has said. ACS says its four member audit committee also is monitoring the situation.

Of the six other directors overseeing the probe, two received some of the well-timed options in question. Two others, who are outside, independent directors, were on the compensation committee that approved grants. The remaining two directors, also independent, are men with whom Mr. Deason has had various past ties.

One is J. Livingston Kosberg. He and Mr. Deason go way back. In the late 1980s, the two were entangled in the collapse of a Texas savings-and-loan institution of which Mr. Kosberg was chairman. In winding up the matter, ACS paid a fine and Mr. Kosberg also paid money to federal regulators. Neither was charged with wrongdoing.

In 1998, Mr. Kosberg joined the board of a company that ACS spun off, Precept Business Services Inc. Mr. Deason was the controlling shareholder of Precept and Mr. Kosberg served on its compensation and audit committees.

Precept filed for bankruptcy protection in 2001. In a lawsuit in federal bankruptcy court in Dallas, a bankruptcy trustee criticized Precept directors for allowing Mr. Deason and relatives of his to -- as the trustee put it -- "systematically loot" the company. The suit, singling out Mr. Kosberg and other directors for particular criticism, alleged that the publicly held company had picked up the tab for a range of Deason-family personal expenses, from country-club memberships and luxury cars to cosmetic surgeries, maids, bodyguards, dry cleaning and limousine service.

Both Mr. Deason and Mr. Kosberg settled with the trustee, Mr. Deason for more than $3 million. He didn't return a call seeking comment. An ACS spokesman said that Mr. Deason continues to deny the trustee's looting allegations and that Mr. Deason personally guaranteed more than $2 million in Precept loans and ultimately bore their cost.

Mr. Kosberg, in an interview, said the Precept board functioned well and "there was no looting." As for the S&L collapse, Mr. Kosberg said he didn't remember the details. "We all walked the plank," he said. He said his relationship with Mr. Deason over the years has been "pure business" and sometimes "strained."

Mr. Kosberg said the ACS board would sort out the stock-options issues: "I know what an independent board is and what a crony board is, and I'm confident that this is an independent board that has the willingness and ability to turn over every rock." He said he is confident in the company's integrity and believes regulators probing for any wrongdoing will "come up empty."

The seventh director of ACS, Dennis McCuistion, a professional speaker, consultant and television producer, also has had longstanding ties to ACS and Mr. Deason. ACS invested $25,000 in a partnership Mr. McCuistion set up to produce a TV show in the late 1980s, said people familiar with the situation, and Mr. Deason later was on the board of a nonprofit television company started by the director. Mr. McCuistion also consulted for one of Mr. Deason's earlier companies, but the people familiar with the matter said any business involvement between the two men ended 17 years ago.

ACS, after being asked by The Wall Street Journal in January about its past options grants, initially said there were no problems. The board later launched its internal probe, calling on its longtime outside legal counsel, Baker Botts LLP, to lead the effort.

In May, the company reported some preliminary findings: While some options grants may have been given incorrect dates, no officer or director had engaged in any intentional backdating, and any accounting adjustments were likely to be minor.

Earlier this week, ACS backtracked from that statement, too, saying investors shouldn't rely on its disclosures about the preliminary findings. ACS said it had hired two more outside law firms to help with the probe.

A company spokesman said ACS has directed lawyers to "do whatever is necessary to objectively reach all the facts." The spokesman said all of the independent directors meet the New York Stock Exchange standards for independence and added: "To suggest that the investigation will be anything other than thorough and objective would be inaccurate and grossly unfair."

At UnitedHealth, which is under both criminal and civil investigation at the federal level, an internal board inquiry has been in progress since at least April. The CEO, Dr. McGuire, is widely praised for molding UnitedHealth into a major force in health insurance in his 15 years as the helm, during which the share price has soared. But questions have been raised about his large option grants, which as of the end of 2005 showed gains from unexercised options of about $1.8 billion. Each of the 12 grants Dr. McGuire got between 1994 and 2002 was dated just before a run-up in the share price, a statistically extraordinary pattern.

In May, the company said the board's review had found some problems with past option grants and that the company might have to restate financial results for the prior three years. The announcement left unanswered questions, including whether any options had actually been backdated and whether anybody in top management or the board had been involved. This week, UnitedHealth said it was delaying filing its second-quarter report over the options issue.

As with any probe of options grants, investigators are likely to be keenly interested in the history of interactions between major recipients such as Dr. McGuire and the compensation-committee members who approved the grants. UnitedHealth has described those members as independent. A close look shows various ties between them and Dr. McGuire or UnitedHealth -- ties that don't necessarily compromise their independence under regulatory standards but that might raise questions about how arms-length they could be. A July article in BusinessWeek noted some of the connections between UnitedHealth directors and management.

One longtime UnitedHealth comp-committee member, William G. Spears, is a money manager with the New York firm Spears Grisanti & Brown LLC. The firm appears to manage money for Dr. McGuire's family foundation. In tax filings covering two recent years, the foundation put the name of Mr. Spears' firm atop a list of its securities transactions. A partner in the firm, Christopher Grisanti, said privacy regulations barred him from saying whether the foundation was a client. Mr. Spears didn't return messages seeking comment.

Another longtime member of the health insurer's compensation panel is Mary O. Mundinger, dean of the Columbia University nursing school. Ms. Mundinger has championed the idea that nurse practitioners can provide high-quality primary care, and in the mid-1990s she shepherded a pioneering project to create a nurse-practitioner clinic in New York. The support of health insurers was critical to getting patients to use it, and UnitedHealth was among several insurers to sign on. In media interviews at the time, UnitedHealth officials spoke approvingly of her project.

Three UnitedHealth board members serve on a special committee that is overseeing the internal investigation of stock-options grants. One of them, James Johnson, is a trustee and another, Douglas Leatherdale, a former board chairman of the University of Minnesota Foundation, a university fund-raising arm. The family foundation of Dr. McGuire, who attended college in Texas, made a $4 million gift to the University of Minnesota Foundation earlier this year to support scholarships and mentoring.

Mr. Burke, the third member of the board committee overseeing the internal probe, is UnitedHealth's founder and a former chief executive. Proxy filings indicate that his wife received stock options as a UnitedHealth employee.