SEC Files Settled Enforcement Actions Against UnitedHealth Group Inc. and Former General Counsel in Stock Options Backdating Case

Litigation Release No. 20836 / December 22, 2008

The Securities and Exchange Commission filed a civil injunctive action against UnitedHealth Group Inc., a Minnetonka, Minnesota health insurance company, alleging that it engaged in a scheme to backdate stock options. Without admitting or denying the allegations, UnitedHealth agreed to settle to charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws.

In a separate complaint, the Commission charged former UnitedHealth General Counsel David J. Lubben with participating in the stock option backdating scheme. Without admitting or denying the allegations, Lubben consented to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar.

The Commission alleges that between 1994 and 2005 UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.

According to the Commission’s complaint, certain UnitedHealth officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date. The backdated grants resulted in materially misleading disclosures, with the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion.

For more see


Record Backdating Settlement Reached in Mercury Case

By Debra Cassens Weiss

A group of pension funds will receive $117.5 million to settle their class action suit against Mercury Interactive Corp. for losses caused by stock options backdating.

The deal is the largest to date in a stock options backdating suit, the San Jose Mercury News reports. Previously the record was an $18 million settlement, according to the law firm representing the funds, Labaton Sucharow.

Mercury had already agreed to pay another $28 million to settle civil fraud charges related to the backdating that were filed by the Securities and Exchange Commission, the Wall Street Journal reports (sub. req.). The agency has also filed civil charges against four former Mercury executives, including former general counsel Susan Skaer.

For more see ABA Law Journal Online.

Poor Internal Controls Lead to Brazen Self-Dealing: SEC Charges Former General Counsel of KLA-Tencor And Juniper for Fraudulent Stock Option Backdating

The SEC filed its latest stock option backdating enforcement action, this time against a former general counsel of two public companies. 

The SEC filed fraud charges against the attorney, Lisa C. Berry, for her role in “illegally backdating stock option grants” from 1997 to 2003, first as GC of KLA-Tencor and then as GC of Juniper Networks.  The SEC alleges that the misconduct resulted in the concealment of hundreds of millions of dollars in executive compensation expenses relating to undisclosed in-the-money option grants.

In related actions, the SEC settled fraud charges against Juniper and KLA.  Without admitting or denying the allegations, Juniper consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.  KLA had previously settled charges brought by the Commission.

The cases show how poor corporate governance and weak internal controls lead to self-dealing, breaches of duties, and securities fraud.  The Complaint specifically alleges that

“Beginning in the second half of 1999, [Berry] routinely prepared backdated stock option grants to issue options to groups of recently hired employees of Juniper. For these new hire grants, the executive collected the names of recently hired employees and had lists prepared. The executive then selected as the exercise price of the new hire grants the closing price of Juniper’s stock on a date in the past, reflecting the low closing price during a particular period around the time the employees were hired. For each backdated grant fkom 1999 through 2003, the executive then created Stock Option Committee meeting “minutes” that falsely stated that the Stock Option Committee had met on the date of the low closing price and granted options on that date.”

“The executive signed the backdated committee “minutes” as a Stock Option committee member. In addition, for each backdated grant the executive either presented the minutes to the other Stock Option Committee members for signature or stamped the minutes with a signature stamp the executive maintained bearing the other Stock Option Committee members’ signatures.”

“Once the executive selected a backdated grant date and a corresponding exercise price, the executive informed Juniper’s stock administrator, who then entered the grants into Juniper’s stock option tracking software using the backdated date as the grant date. Juniper did not reflect in its books an expense related to the in-the-money portion of the options.”

Here is a copy of the Complaint filed against Berry in the U.S. District Court for the Northern District of California, San Jose Division and the Complaint settled with Juniper

SEC Stumbles on Privilege Waivers

Justin Scheck
The Recorder
September 10, 2007

By the middle of last month, Securities and Exchange Commission lawyers were growing frustrated with running into claims of attorney-client privilege in their probe of troubled chipmaker Marvell Technology. The company had investigated its past stock options grants and found a widespread pattern of misdating. But Marvell’s former general counsel told Marvell board members that the internal investigation was biased, and that accusation piqued the interest of the SEC.Lawyers there wanted to interview the former general counsel, Matthew Gloss, according to attorneys briefed on the case. But Marvell, they said, claimed that whatever Gloss had to say about the internal probe was covered by attorney-client privilege.That put SEC lawyers in a tough position: The commission adopted a policy late last year of not asking for privilege waivers, even in situations — like the Marvell case — in which they clearly expect them. Continue reading

Brocade to Pay $7 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating

As reported in an earlier post, the SEC has, indeed, settled backdating claims against issuer Brocade Communications Systems, Inc.

The SEC press release indicates that it filed “a civil action against Brocade Communications Systems, Inc., a San Jose, California computer networking company, for falsifying its reported income from 1999 through 2004. Brocade has agreed to pay a penalty of $7 million to settle the charges that it committed fraud through its former CEO and other former executives who repeatedly granted backdated stock options, misstated compensation expenses, and concealed the conduct by falsifying documents.”

For more see SEC Press Release.

Email Trail Comes Back to Haunt Former Executives: SEC Settles With Mercury Interactive and Sues Former Mercury Officers for Stock Option Backdating and Other Fraudulent Conduct

In an earlier post, it was reported that an allegedly inculpatory email trail between in-house counsel and executives at Mercury Interactive regarding stock options could lead to regulatory or criminal action. That possibility became a reality, as the SEC has announced a settlement stemming from that evidence discovered in the form of email.

In a press release, the Securities and Exchange Commission announced that it “filed civil fraud charges in federal district court for the Northern District of California against California-based software maker Mercury Interactive, LLC (formerly known as Mercury Interactive Corporation) and four former senior officers of Mercury — former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer. The SEC alleges that the former senior officers perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The SEC also alleges that during this period Mercury, through Landan and at times Abrams, Smith or Skaer, backdated stock option exercises, made fraudulent disclosures concerning Mercury’s “backlog” of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses. Mercury, which was acquired by Hewlett-Packard Company on November 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million civil penalty and to be permanently enjoined.”

For more see SEC Press Release and Complaint.

SEC Settles With IBM for Misleading Statements Regarding Stock Option Expenses


Washington, D.C., June 5, 2007 – The Securities and Exchange Commission announced today a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning the impact that the company’s decision to expense employee stock options would have on its first quarter 2005 (1Q05) and fiscal year 2005 (FY05) financial results. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company.

For more see the SEC’s Press Release.