It has been big news that the former chairman and CEO of UnitedHealth, William W. McGuire, has agreed to settle a backdating case with the SEC and, as part of the settlement, to pay $468 million. Moreover, for the first time, the Commission has used the clawback provisions in SOX to require an officer to return compensation to a company following a restatement. On closer examination, however, the case is more bark than bite.
According to the litigation release, McGuire must disgorge somewhere around $12 million, including interest and pay a penalty of $7 million. The bulk of the $468 million ($448 million) is to be paid back to the company under the compensation clawback provision in Section 304 of SOX. This is the provision that requires the CEO and CFO to "reimburse" the company for certain incentive/equity based compensation or stock sales in the aftermath of a restatement that resulted from "misconduct, with any financial reporting requirement under the securities laws,"
All fairly impressive numbers. But in fact, McGuire will actually disgorge nothing. As the penultimate paragraph of the litigation release notes:
- Under the terms of the settlement, McGuire’s disgorgement plus prejudgment interest and his Section 304 reimbursement would be deemed satisfied by his return to UnitedHealth of approximately $600 million in cash and UnitedHealth options pursuant to the terms of his separate settlement with the company, also announced today, resolving employment claims and shareholder derivative lawsuits filed against McGuire in state and federal courts in Minnesota. McGuire’s settlement with the SEC is subject to the approval of the U.S. District Court for the District of Minnesota.
In other words, the only apparent addition made by the Commission was an insignificant penalty ($7 million is petty cash to someone who retains as theWall Street Journal notes, "about 24 million stock options that currently could be cashed in for a gain of roughly $800 million, on top of about $530 million in pay he pocketed while running UnitedHealth from 1991 to 2006.") and a ten year bar from serving as an officer or director of a public company. Such bars, by the way, are usually for life so ten years is a bargain. All of this suggests that the Commission piggy backed the private litigation, adding modestly to the outcome.
This case illustrates an issue that came up in the Stoneridge litigation. Some argued that there was no reason to extend liability to vendors under Rule 10b-5 because of the enforcement authority of the Commission. In fact, it is private litigation that provides the greatest deterrence, as this case indicates.