UnitedHealth Group (UNH)

Supplemental Grant of October 13, 1999

We have concluded that this supplemental option grant was likely backdated.

As with other option grants, the pricing and dating of the supplemental grants is problematic. The first reference to the supplemental grant appears in a memorandum from Dr. McGuire to Mr. Spears dated October 12, 1999. While Dr. McGuire states that he had one or more communications with Mr. Spears on or about October 13, 1999 regarding, among other things, the supplemental grant program, neither this conversation nor the October 22 memorandum from Dr. McGuire to the Compensation Committee is sufficient to effectuate the supplemental grants. Both memos speak prospectively of the supplemental grant that “should be awarded to employees.” Thus, the later of the two memoranda makes clear that, as of October 22, the supplemental grant proposal had not been presented to, or considered by, the Compensation Committee. Since the Compensation Committee next met on October 26, 1999, it is unlikely that it considered the proposal before that date. However, the option grant to Section 16 officers is dated “effective October 13, 1999” and priced at the closing price on that date. October 13, 1999 was the lowest closing price of the year.

In addition, the October 1999 supplemental option grant created significant accounting issues. The grant was made for the stated purpose of “replacing” certain out of money options then held by the Company’s officers and employees. Some of the options that were being replaced – including all of Dr. McGuire’s 750,000 options that had an exercise price above 46.50 – were back “in the money” by the time management sought approval from the Compensation Committee for the supplemental option proposal, which likely was approved on October 26, 1999. In connection with the issuance of the supplemental options, the Company intended to suspend the vesting and exercisability of the options that were being replaced.

It appears that the proposal to suspend old options and issue new, lower priced ones was driven, in part, by a desire to avoid repricing the existing options, which had disadvantageous accounting and disclosure ramifications. The grant of the supplemental options was effectively a repricing for accounting purposes to the extent that such options were granted in conjunction with the actual suspension of any existing options. The reactivation of the suspended options was, in substance, a grant of “in the money” options. Since the supplemental grant amounted to a repricing, the Company had substantial and onerous reporting obligations in its Proxy statement with which it did not comply. Further, the Company did not treat the reactivation as a discount grant for accounting purposes.