In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
United Health Group is one of many companies that became the target of investigations by federal prosecutors and the U. Securities and Exchange Commission over alleged stock options backdating.
Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.
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. Next, plaintiffs moved the court to unseal the record and publicly expose the company’s fraudulent options practices.
At the hearing on the motion, Magistrate Judge Franklin L. The court ordered that certain previously redacted facts and evidence revealing the true scope of defendants’ fraud be made available to the public.
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 identified United Health as a company with “wildly improbable option-grant patterns.” By April 2006, the SEC had begun an informal inquiry prompting United Health to initiate an independent investigation into its own historical stock options granting practices.
After being selected as lead plaintiff, Cal PERS filed a consolidated complaint in December 2006. Rosenbaum denied defendants’ motions to dismiss the consolidated complaint in their entirety, and compared defendants’ scheme to the movie 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.
Although accounting issues concerning stock options grants are complex, the documents and testimony plaintiffs acquired during discovery established a strong case regarding liability.
Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.
Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.
Just over two months later, a settlement was also reached with the two remaining defendants – bringing the total recovery for the class to over 5 million.
In addition to the monetary recovery, United Health 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.
It allegedly failed to inform investors, or account for the options expense(s) properly.