ruth polishook, et al. v. unitedhealth group, inc., et al...

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UNITED STATES DISTRICT COURTDISTRICT OF MINNESOTA

RUTH POLISHOOK, on behalf of herself andall others similarly situated,

Plaintiff,V .

UNITEDHEALTH GROUP INC.,WILLIAM W. MCGUIRE and STEPHEN J .HEMSLEY,

Civil Action No. 06 _c ;

JURY TRIAL DEMANDED

Defendants ,

CLASS ACTION COMPLAINT

Plaintiff Ruth Polishook, by her attorneys, on behalf of herself and all other s

similarly situated , alleges the following based upon the investigation of her counsel ,

except as to allegations specifically pertaining to herself, which are based on personal

knowledge . The investigation of counsel included, among other things, a review o f

public filings and press releases by UnitedHealth Group Incorporated news

reports about UNH, and publicly available data relating to the trading prices and volume s

of UNH's common stock.

INTRODUCTION

1 . This is a class action under the federal securities laws on behalf of a clas s

consisting of all persons who purchased the common stock of UNH between May 15 ,

20011 and May 10, 2006, inclusive (the "Class Period") .

1 A putative securities class action arising out of the facts alleged in this complaint wasfiled in this Court on or about May 5, 2006 . Accordingly, the applicable five-year statuteof limitations has been tolled as to the Class since that date, and the claims of al l

56435 .1SCANN E

'JUN a t 2006

2. These claims arise out of Defendants ' false and misleading statements and

omissions regarding UNH's backdating of stock option grants to Defendants McGuir e

and Hemsley (the "Individual Defendants") and other UNH executives .

3 . A series of recent articles in The Wall Street Journal has revealed that

hundreds of millions of dollars of stock option grants to the Individual Defendants and t o

other UNH executives were almost certainly backdated, Simply put, the Individual

Defendants were routinely stealing from UNH and then lying about it to the market an d

to UNH's shareholders . As a result, the market price of UNH's common stock wa s

artificially inflated during the Class Period .

JURISDICTION AND VENU E

4. The claims asserted in this complaint arise under Sections 10(b) and 20(a)

of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U .S.C. §§ 78j(b) ,

78t(a), and Rule I Ob-5 promulgated thereunder by the SEC, 17 C .F.R . § 240 .1 Ob-5 .

5. The Court has jurisdiction pursuant to 28 U.S .C. §§ 1331 and 1337 and

Section 27 of the Exchange Act, 15 U .S .C. § 78aa. Venue in this District is prope r

pursuant to 28 U .S .C. § 1391(b) and Section 27 of the Exchange Act, because UNH and

the Individual Defendants conduct business in this District, and the wrongful conduc t

took place in this District.

THE PARTIE S

6 . Plaintiff Ruth Polishook purchased UNH common stock during the Clas s

Period at artificially inflated prices, as detailed in the attached Certification, and wa s

damaged thereby.

members of the Class defined in this complaint are timely .

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i,

7. Defendant UNH is a Minnesota corporation with its principal executive

offices at 9900 Bren Road East, Minnetonka, Minnesota. UNH describes itself as a

diversified health and well-being company, serving approximately 65 million Americans .

It describes itself as providing individuals with access to healthcare services through

more than 500,000 physicians and other care providers and 4,600 hospitals across the

United States .

8 . Defendant William W. McGuire ("McGuire") was UNH 's Chairman and

Chief Executive Officer during the Class Period and still holds those positions . During

the Class Period, McGuire sold millions of UNH shares at artificially inflated prices .

Further, as of December 31, 2005, McGuire had exercisable "in-the-money" options t o

purchase UNH common shares valued at $1,601 ,658,510, and "in-the-money" options

not yet exercisable valued at an additional $174,889,125 .

9. Defendant Stephen J . Hemsley ("Hemsley") was UNH' s President an d

Chief Operating Officer during the Class Period and still holds those positions . During

the Class Period, Hemsley sold hundreds of thousands of UNH shares at artificiall y

inflated prices . Further, as of December 31, 2005, Hemsley had exercisable "in-the-

money" options to purchase UNH common shares valued at $662,546,318, and "in-the-

money" options not yet exercisable valued at an additional $81,685,750 .

10 . The Individual Defendants , because of their positions with UNH ,

possessed the power and authority to control the contents of its filings with the SEC, it s

press releases and other public statements, and its presentations to securities analysts ,

money and portfolio managers and institutional investors, and they did control such

contents .

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r .

CLASS ACTION ALLEGATION S

11 . Plaintiff brings this action as a class action pursuant to Federal Rules o f

Civil Procedure 23(a) and 23 (b)(3) on behalf of a class of all persons (the "Class") who

purchased the common stock of UNH during the Class Period of May 15, 2001 through

May 10, 2006, inclusive . Excluded from the Class are Defendants, the members of th e

immediate families of the Individual Defendants , all executive officers of UNH and all

entities of which any Defendant had or has a con trolling interest.

12 . The members of the Class are so numerous that joinder of all members is

impracticable . While the exact number of Class members is unknown to Plaintiff at the

present time and can only be ascertained through appropriate discovery, Plaintiff believe s

that there are hundreds or thousands of members of the Class located throughout th e

United States . As of February 15, 2006, there were 1,356,292,073 shares of UNH

common stock outstanding, which were actively traded on the New York Stock Exchange

in an efficient market .

13 . Plaintiff' s claims are typical of the claims of the members of the Class .

Plaintiff and all members of the Class have sustained damages because of Defendants '

wrongful conduct as alleged in this complaint . Plaintiff has retained counsel competent

and experienced in class and securities litigation and intends to pursue this actio n

vigorously. The interests of the Class will be fairly and adequately protected by Plaintiff,

who has no interests that are contrary to or in conflict with those of the Class .

14. A class action is superior to all other available methods for the fair an d

efficient adjudication of this controversy . Plaintiff knows of no difficulty in th e

management of this action that would preclude its maintenance as a class action .

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15 . Common questions of law and fact exist as to all members of the Clas s

and predominate over any questions solely affecting individual members of the Class .

Among the questions of law and fact common to the Class are :

(a) whether the federal securities laws were violated by Defendants' acts and

omissions as alleged in this complaint ;

(b) whether Defendants misstated and/or omitted to state material facts in their

public statements about UNH and filings with the SEC ;

(c) whether Defendants participated directly or indirectly in the course of conduc t

complained of in this complaint ; and

(d) whether the members of the Class have sustained damages, and the prope r

measure of such damages .

OPTIONS AS EXECUTIVE COMPENSATION, AND UNH'S OPTION PLAN

16. Stock options have been a very common component of executiv e

compensation during the past two decades . As explained by The Wall Street Journal in

its article dated March 18, 2006 entitled "The Perfect Payday - Some CEO's reap

millions by landing stock options when they are most valuable ; Luck - or something

else?" :

Stock options give recipients a right to buy company stockat a set price, called the exercise price or strike price . Theright usually doesn't vest for a year or more, but then itcontinues for several years. The exercise price is usuallythe stock's 4 p .m . price on the date of the grant . . . .Naturally, the lower it is, the more money the recipient canpotentially make someday by exercising the options .

Which day's price the options carry makes a big difference .Suppose an executive gets 100,000 options on a day whenthe stock is at $30 . Exercising them after it has reached$50 would bring a profit of $20 times 100,000, or $2

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million . But if the grant date was a month earlier and thestock then was at, say, $20, the options would bring in anextra $1 million.

A key purpose of stock options is to give recipients anincentive to improve their employer's performance,including its stock price . No stock gain, no profit on theoptions . Backdating them so they carry a lower pricewould run counter to this goal, by giving the recipient apaper gain right from the start .

17. Indeed, at all relevant times, the UNH options granted to the Individual

Defendants were required to carry a strike price not less than the publicly trading closing

price of the stock on the date of grant . All such options were issued pursuant to UNH' s

Amended and Restated 1991 Stock and Incentive Plan, Amended and Restated Effective

May 12, 1997, Amended and Effective May 9, 2001 (the "Plan"), which specificall y

provides :

5 . PRICE

The option price for all Incentive Stock Options grantedunder the Plan shall be determined by the Committee butshall be not less than 100 % of the fair market value ofthe Common Shares at the date of grant of suc hoption . . . . For purposes of this Section 5 and all othervaluation purposes under the Plan, the fair market value ofthe Common Shares shall be as reasonably determined bythe Committee ; provided that for the purposes of the firstsentence of this Section 5, the fair market value of theCommon Shares shall be not less than the closing priceof the stock on the date for which fair market value isbeing determined , as reported on any national securitiesexchange on which the Common Shares are thentraded .

(Emphasis added . )

18 . The same requirement was set forth in all of UNH's annual prox y

statements during the relevant period, and was also embodied in its executive

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compensation agreements, including Defendant McGuire's .

19. Consistent with these requirements, and consistent with what should be a

policy of virtually eliminating the possibility of fraudulent backdating, UNH's Non-

Employee Director Stock Option Plan requires that option grants be made at the same

well-defined time each year. Other public companies have similar plans or practices for

their executives . But UNH's employment agreements with the Individual Defendants

contained no such safeguards . Even more unusually, and facilitating the opportunity to

commit additional fraud, Defendant McGuire's employment agreement with UNH, date d

October 13, 1999, gave him contro l over the grant dates of his own options :

The Annual Options shall be granted on such date or datesas Executive requests by oral notification to the Chair ofthe Compensation and Human Resources Committee . . . .

20 . As Defendant McGuire admitted in an interview published in the onlin e

version of Forbes on May 1, 2006 , stock options are funded by "shareholder dollars . "

When options are exercised, the lower the option price, the less money the corporation

receives in exchange for each share it is obliged to issue at the time of exercise . Further,

the shares of all other shareholders are diluted by the new shares .

21 . The harm of backdated options does not fall just on the subject corporatio n

and its shareholders. It is also likely, as it did here, to harm purchasers of the

corporation's stock. That is because, as the March 18, 2006 Wall Street Journal article

noted, backdating options granted to executives of public companies goes hand in han d

with securities fraud :

Companies have a right to give executives lavishcompensation if they choose to, but they can't misleadshareholders about it . Granting an option at a price belowthe current market value, while not illegal in itself, could

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result in false disclosure . That's because companies granttheir options under a shareholder-approved "option plan"on file with the SEC . The plans typically say options willcarry the stock price of the day the company awards themor the day before . If it turns out they carry some otherprice, the company could be in violation of its options plan,and potentially vulnerable to an allegation of securitiesfraud .

22. In the same article, as further detailed below, The Wall Street Journal

effectively concluded that UMI's option grants to at least Defendant McGuire must have

been fraudulent. Citing an academic expert who had reviewed its methodology, th e

Journal concluded that the odds of Defendant McGuire' s massive UNH options having

resulted in such a favorable pattern by chance were one in 200 million or greater .

23 . The Sarbanes-Oxley Act of 2002 changed the reporting requirements

mandating that option grants and exercises be publicly reported within two days, whic h

substantially changed the ability of public companies and their executives to backdate

options . But the fraudulent effects of the backdating of massive numbers of options t o

the Individual Defendants and other UNH executives continued throughout the Class

Period because, as detailed below, UNH's violation of basic accounting principles in it s

reporting about the backdated options resulted in its income being materially overstated ,

which in turn artificially inflated the market price of UNH common stock throughout th e

Class Period .

DEFENDANTS' OPTIONS : NO ONE COULDHAVE BEEN THIS LUCKY

24 . Prior to and during the Class Period, until passage of the Sarbanes-Oxle y

legislation necessarily curbed the Individual Defendants' fraudulent avarice, the option s

granted to the Individual Defendants were consistently correlated to a day or near a da y

56435 .1

when UNH stock hit its low price for the year, or a day directly in advance of a sharp

price increase . In each of Paragraphs 25-31 below, the date of the purported grant is the

date reported by Defendants in their SEC filings and other public statements. Each such

date proved remarkably (and statistically impossibly) lucky for the options' recipient .

25. During 1997, the market price of UNH common shares ranged from

$43 .06 to $60 per share , with an average closing price of $50.87 . Defendant McGuire

received two stock option grants in 1997. The first, purportedly on February 11, 1997 ,

was an option to purchase 200,000 shares at an exercise price of $46 .88 . The stock close d

four dollars higher at $50 .66 only ten days later. The second grant, purportedly on

October 27, 1997, was an option to purchase 250,000 shares at an exercise price o f

$43 .06 -- the lowest market close of the entire year .

26. During 1998, the market price of UNH common shares ranged from

$31 .31 to $72 . 75 per share , with an average closing price of $52 .95. McGuire received

two stock option grants in 1998 . The first, purportedly on January 20, 1998, was a n

option to purchase 250,000 shares at an exercise price of $47 .94. The stock closed at

$52 .13 only ten days later . McGuire's second 1998 grant, purportedly on October 16 ,

1998, was an option to purchase 240,000 shares at an exercise price of $40 .00 .

27. Defendant Hemsley received three stock option grants in 1998 . The first,

purportedly on February 6, 1998, was an option to purchase 60,000 shares at an exercis e

price of $52 .25. The stock closed over seven dollars higher only ten days later .

Hemsley's second grant, purportedly on August 17, 1998, was an option to purchase

100,000 shares with an exercise price of $31 .31 -- the lowest market close for the entire

year. The stock closed three dollars higher only ten days later. Hemsley's third grant ,

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purportedly on October 16, 1998 , was an option to purchase 120,000 shares at an exercise

price of $40 .00 .

28. During 1999, the market price of UNH common stock ranged from $40 .1 3

to $69.75 per share, with an average closing price of $64 .62. Defendants McGuire and

Hemsley each received two stock option grants in 1999 . The first grant was purportedly

on February 12, 1999, with an exercise price of $46.81 - 250,000 shares for McGuire and

100 shares for Hemsley. The stock closed at $50 .38 only ten days later. The second

1999 grant was purportedly on October 13, 1999, with an exercise price of $40 .13 - the

lowest market close for the entire year -1,825,000 shares for McGuire and 910,000 fo r

Hemsley .

29. During 2000, the market price of UNH common stock ranged from $47 .63

to $120.88 per share, with an average closing price of $81 .46. McGuire and Hemsle y

each received one stock option grant during 2000, purportedly on March 8, 2000, with a n

exercise price of $47.63 - the lowest market close for the entire year - 650,000 shares fo r

McQuire and 300,000 for Hemsley .

30. During 2001, the market price of UNH common stock ranged from $51 .56

to $72.19 per share, with an average closing price of $62 .54. McGuire and Hemsley eac h

received one stock option grant during 2001, purportedly on January 17, 2001, with a n

exercise price of $52.69 - barely a dollar more than the lowest market close for the entire

year - 650,000 shares for McQuire and 300,000 for Hemsley . This date immediately

preceded a sharp rise in the market price of UNH common stock .

31 . During 2002, the market price of UNH common stock ranged from $68 .1 3

to $100.37 per share, with an average closing price of $84 .62. McGuire and Hemsley

56435.1 10

each received one stock option grant during 2002, purportedly on January 7, 2002, wit h

an exercise price of $69 .55 - again barely a dollar more than the lowest market close fo r

the entire year - and again 650,000 shares for McQuire and 300,000 for Hemsley . This

date immediately preceded a sharp rise in the market price of UNH common stock .

32. Numerous other executive officers of UNH received substantial numbers

of similarly backdated options during the same time period . These officers included

Secretary and General Counsel David J . Lubben; Executive Vice President o f

UnitedHealth Group Jeannine M . Rivet ; CEO of UnitedHealthcare Robert J . Sheehy; and

former executives R. Channing Wheeler, David P . Koppe and James G. Carlson, of

whom Lubben, Wheeler and Sheehy received options purportedly granted on dates during

the Class Period .

33. In fact, the conclusion is inescapable that the purported grant dates for al l

of the above-described options were arrived at by benefit of hindsight .

FALSE AND MISLEADING STATEMENTS

34. The Class Period begins on May 15, 2001 when Defendants caused UNH

to file its quarterly report on Form 10-Q for the quarter ended March 31, 2001 with th e

SEC. The Form 10-Q, signed by Defendant Hemsley, included UNH's financial result s

for the quarter ended March 31, 2001 and stated that UNH reported $ 212 million in ne t

earnings and net earnings per share of $0 .64 .

35 . On July 27, 2001, Defendants caused UNH to issue a press release titled

"UnitedHealth Group Reports Record Second Quarter Net Earnings of $0 .68 Per Share . "

The press release stated , among other things , that UNH reported second quarter net

earn ings per share of $0 .68 and consolidated net earnings of $223 million .

56435.1 11

36. On August 14, 2001, Defendants caused UNH to file its quarterly repor t

on Form 10-Q for the quarter ended June 30, 2001 with the SEC . The Form 10-Q, signed

by Defendant Hemsley, included UNH's financial results for the quarter ended June 30 ,

2001 and stated that UNH reported $ 223 million in net earnings and net earnings per

share of $0 .68.

37. On October 26, 2001, Defendants caused UNH to issue a press releas e

titled "UnitedHealth Group Reports Record Third Quarter Net Earnings of $0 .71 Per

Share ." The press release stated, among other things, that UNH reported third quarter ne t

earnings per share of $0 .71 and net earnings of $231 million.

38. On November 14, 2001, Defendants caused UNH to file its quarterly

report on Form I0-Q for the quarter ended September 30, 2001 with the SEC . The Form

IO-Q, signed by Defendant Hemsley, included UNH's financial results for the quarter

ended September 30, 2001 and stated that UNH reported $231 million in net earnings and

net earn ings per share of $0 .71 .

39. On December 12, 2001, Defendants caused UNH to issue a press release

titled "UnitedHealth Group Announces Recent Stock Transactions ." The press releas e

stated in part the following:

MINNEAPOLIS (December 12, 2001) - UnitedHealthGroup (NYSE : UNH) today announced that William W .McGuire, MD, chairman and chief executive officer, andStephen J . Hemsley, president and chief operating officer,had exercised 920,000 and 350,000 stock options,respectively, and subsequently sold the underlying shares .

The exercise represents approximately 10 percent of theoptions held by Dr. McGuire and 10 percent of those heldby Mr. Hemsley and is roughly comparable to their annualoption grants pursuant to employment and incentivearrangements with the company .

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40 . On January 24, 2002, Defendants caused UNH to issue a press release

titled "UnitedHealth Group Reports Record Fourth Quarter And Full Year Earnings Of

$0.76 And $2 .79 Per Share ." The press release stated, among other things, that UNH

repo rted fourth quarter net earnings per share of $0.76 and net earnings of $247 million

and full year net earnings per share of $2 .79 and net earnings of $913 million .

41 . On April 1, 2002, Defendants caused UNH to file its Annual Repo rt on

Form 10-K for the year ended December 31, 2001 with the SEC. The Form 10-K, signe d

by Defendants McGuire and Hemsley, included UNH's financial results for the year

ended December 31, 2001 and stated that UNH reported net earnings of $913 million and

diluted net earnings per common share of $2 .79. It further stated that "We have prepared

the consolidated financial statements according to accounting principles generally

accepted in the United States and have included the accounts of UnitedHealth Group and

its subsidiaries ."

42. The 2001 Form 10-K stated the following concerning "Stock-Based

Compensation" : "We do not recognize compensation expense in connection wit h

employee stock option grants because we grant stock options at exercise prices that equa l

or exceed the fair market value of the stock on the date the options are granted . "

43. In addition, the 2001 Form 10-K had attached as an exhibit the Plan (th e

relevant language of which concerning the requirement that options be priced at fai r

market value on the date of grant is set fo rth in Paragraph 17 above) .

44. On April 4, 2002, Defendants caused UNH to file its Proxy Statement

Pursuant to Section 14(a) of the Securities Exchange Act of 1934 on Schedule 14A wit h

the SEC . The Proxy Statement stated that during 2001 Defendant McGuire was awarde d

56435.1 13

650,000 stock options and Defendant Hemsley was awarded 300,000 options . In addition,

it stated :

The Committee believes it is important to link a significantportion of Dr. McGuire's potential compensation to futureCompany performance . As part of his overal lcompensation package, Dr . McGuire receives grants ofstock options and restricted stock awards from time to time .Pursuant to the terms of his employment agreement, theCompany granted to Dr. McGuire in 2001 an option topurchase 650,000 shares at an exercise price of $52.6875per share , which was the fair market value of the stockon the grant date.

Compliance with Internal Revenue Code Section 162(m) .Section 162(m) of the Code, enacted in 1993, generallydisallows a tax deduction to publicly held companies forcompensation exceeding $1 million paid to each of thecorporation's chief executive officer and four other mosthighly compensated executive officers . Qualifyingperformance-based compensation will not be subject to thededuction limit if certain requirements are met . TheCompany's 1991 Stock Incentive Plan has been structuredin a manner that appears to comply with the statute'srequirements with respect to stock options and performanceawards. As a result, the Company generally does notexpect compensation associated with stock options issuedunder the 1991 Stock Incentive Plan to be subject to thededuction limit . Because the majority of the Company'sexecutive officers' compensation that could exceed the $1million limitation is associated with such stock options, theCompany does not expect this deduction limitation to havea material effect on its operations or financial condition .The 2002 Stock Plan and Incentive Plan previouslydescribed have also been structured in a manner thatappears to comply with the statute's requirements, providedeach plan is approved by the shareholders at the annualmeeting to which this Proxy Statement relates . Assumingsuch approval is obtained, the Company generally does notexpect compensation associated with stock options, stockappreciation rights or performance awards issued under the2002 Stock Plan, or compensation paid under the IncentivePlan, to be subject to the deduction limit . Other than the2002 Stock Plan and the Incentive Plan, the Company doesnot expect to take any further action with respect to its

56435.1 14

compensation programs in order to avoid payingcompensation for which the Company would lose thecorresponding tax deduction .

(Emphasis added . )

45. On April 18, 2002, Defendants caused UNH to issue a press release title d

"UnitedHealth Group Reports Record First Quarter Net Earnings Of $ .92 Per Share . "

The press release stated, among other things, that UNH reported first quarter earnings per

share of $0 .92 and first quarter consolidated net earnings of $295 million .

46. On May 14, 2002, Defendants caused UNH to file its quarterly report o n

Form 10-Q for the period ended March 31, 2002 with the SEC . The Form 10-Q, signed

by Defendant Hemsley, included UNH's financial results for the period ended March 31,

2002 and stated that UNH reported first quarter earnings per share of $0.92 and first

quarter consolidated net earnings of $295 million .

47. On July 18, 2002, Defendants caused UNH to issue a press release title d

"UnitedHealth Group Reports Record Second Quarter Net Earnings Of $1 .01 Per Share . "

The press release stated, among other things , that UNH reported second quarter earnings

per share of $1 .01 and second quarter consolidated net earnings of $325 million .

48. On August 13, 2002, UNH filed its quarterly report on Form 10-Q for the

period ended June 30, 2002 with the SEC . The Form 10-Q, signed by Defendant

Hemsley, included UNH 's financial results for the period ended June 30, 2002 and stated

that UNH reported second quarter earnings per share of $1 .01 and second quarter

consolidated net earnings of $325 million.

49 . On October 17, 2002, Defendants caused UNH to issue a press release

titled "UnitedHealth Group Reports Record Third Quarter Net Earnings Of $1 .12 Per

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Share ." The press release stated, among other things, that UNH reported third quarte r

earnings per share of $1 .12 and third quarter consolidated net earnings of $353 million .

50. On November 14, 2002, Defendants caused UNH to file its quarterly

report on Form 10-Q for the period ended September 30, 2002 with the SEC . The Form

10-Q, signed by Defendant Hemsley, included UNH's financial results for the period

ended September 30, 2002 and stated that UNH reported third quarter earnings per share

of $1 .12 and third quarter consolidated net earnings of $352 million . In addition ,

Defendant McGuire filed a certifications pursuant to section 302 of the Sarbanes-Oxley

Act of 2002 that stated in part :

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly report ;

3 . Based on my knowledge, the financial statements, andother financial information included in this quarterly report,fairly present in all material respects the financialcondition, results of operations and cash flows of theregistrant as of, and for, the periods presented in thisquarterly report ; . . .

5 . The registrant's other certifying officer and I havedisclosed, based on our most recent evaluation, to theregistrant's auditors and the audit committee of registrant' sboard of directors (or persons performing the equivalentfunction) :

a) all significant deficiencies in the design or operationof internal controls which could adversely affect theregistrant's ability to record, process, summarize and reportfinancial data and have identified for the registrant'sauditors any material weaknesses in internal controls ; and

56435 .1 16

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant's internal controls[ . ]

51 . On January 23, 2003, Defendants caused UNH to issue a press releas e

titled "UnitedHealth Group Reports Record Fourth Quarter And Full Year Earnings o f

$1 .20 And $4 .25 Per Share ." The press release stated in part that UNH reported fourth

quarter earnings per share of $1 .20 and fourth quarter consolidated net earnings of $379

million and full year 2002 earnings per share of $4.25 and consolidated net earnings o f

$1 .35 billion .

52. On March 19, 2003 , Defendants caused UNH to file its Annual Repo rt on

Form 10-K for the year ended December 31, 2002 with the SEC . The Form 10-K, signed

by Defendant McGuire, included UNH's financial results for the year ended December

31, 2002 and stated that UNH reported net earnings of $1 .35 billion and diluted net

earnings per common share of $4 .25 . It further stated that "We have prepared the

consolidated financial statements according to accounting principles generally accepted

in the United States and have included the accounts of UnitedHealth Group and it s

subsidiaries ." The report included a Sarbanes-Oxley certification signed by Defendan t

McGuire that stated in part :

2. Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly [sic] report ;

3 . Based on my knowledge, the financial statements, andother financial information included in this annual report,fairly present in all material respects the financialcondition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annua l

56435.1 17

report ; . . .

5 . The registrant's other certifying officer and I havedisclosed, based on our most recent evaluation, to theregistrant's auditors and the audit committee of registrant' sboard of directors (or persons performing the equivalentfunction) :


b) any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant 's internal controls[ . ]

53. In addition, the 2002 Annual Report stated :

We account for activity under our stock-based employeecompensation plans under the recognition and measurementprinciples of APB (Accounting Principles Board) OpinionNo. 25, "Accounting for Stock Issued to Employees ."Accordingly, we do not recognize compensation expense inconnection with employee stock option grants because wegrant stock options at exercise prices not less than thefair value of our common stock on the date of grant .

(Emphasis added . )

54. On April 9, 2003 Defendants caused UNI-I to file its Proxy Statement

Pursuant to Section 14 (a) of the Securities Exchange Act of 1934 on Schedule 14A with

the SEC . The Proxy Statement stated in part that :

The Committee believes it is important to link a significantportion of Dr . McGuire's potential compensation to futureCompany performance. As part of his overallcompensation package, Dr . McGuire receives grants ofstock options from time to time . Pursuant to the terms ofhis employment agreement, in 2002 we granted Dr .McGuire an option to purchase 650,000 shares of ourcommon stock at an exercise price of $69 .55 per share,which was the fair market value of the stock on the

56435.1 18

grant date . . . .

Section 162(m) of the Internal Revenue Code generallydisallows a tax deduction to publicly held companies forcompensation exceeding $1 million paid to each of thecompany's chief executive officer and four other mosthighly compensated executive officers . Qualifyingperformance-based compensation will not be subject to thededuction limit if certain requirements are met . TheCompany's 2002 Stock Incentive Plan and the ExecutiveIncentive Plan are structured in a manner that we believecomplies with the statute's requirements . Accordingly, theCompany generally does not expect compensationassociated with stock options, stock appreciation rights orperformance awards issued under the 2002 Stock IncentivePlan, or compensation paid under the Executive IncentivePlan, to be subject to the deduction limit . The Companydoes not expect to take any further action with respect to itscompensation programs in order to avoid payingcompensation for which the Company would lose thecorresponding tax deduction .

(Emphasis added .)

55 . On April 16, 2003, Defendants caused UNH to issue a press release titled

"UnitedHealth Group Reports Record First Quarter Net Earn ings Of $1 .29 Per Share."

The press release stated that UMI reported first quarter earnings per share of $1 .29 and

consolidated net earnings of $403 million.

56. On May 15, 2003 , Defendants caused UNH to file its quarterly report on

Form 10-Q for the period ended March 31, 2003 with the SEC . The Form 10-Q, signe d

by Defendant Hemsley, included UNH's financial results for the period ended March 31 ,

2003 and stated that UNH reported first quarter earnings per share of $1 .29 and first

quarter consolidated net earnings of $403 million . In addition, Defendant McGuire file d

a certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 that stated in

part :

56435.1 19

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly report .

3 . Based on my knowledge, the financial statements, andother financial information included in this quarterly report,fairly present in all material respects the financialcondition, results of operations and cash flows of theregistrant as of, and for, the periods presented in thisquarterly report ; . . .

5 . The registrant 's other cert ifying o fficer and I havedisclosed, based on our most recent evaluation, to theregistrant ' s auditors and the audit commi ttee of registrant' sboard of directors (or persons performing the equivalentfunction) :


b) any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant's internal controls[ . ]

57 . In its Notes [Note 2] To Condensed Consolidated Financial Statements ,

the first quarter 2003 Form 10-Q also contained the statement :

2. Stock-Based Compensation

We account for activity under our stock-based employeecompensation plans under the recognition and measurementprinciples of Accounting Principles Board Opinion No . 25,"Accounting for Stock Issued to Employees . "Accordingly, we do not recognize compensation expensewhen we grant employee stock options because we grantstock options at exercise prices not less than the fairmarket value of our common stock on the date of grant .

(Emphasis added . )

56435.1 20


"UnitedHealth Group Reports Record Second Quarter Net Earnings Of $31 Per Share . "

The press release stated that UNH reported second quarter earnings per share of $0.7 1

and consolidated net earnings of $439 million .

59 . On July 31, 2003, Defendants caused UNH to issue a press release title d

"UnitedHealth Group Announces Recent Executive Stock Transactions ." The pres s

release stated , in part, the following :

MINNEAPOLIS (July 31, 2003) - UnitedHealth Group(NYSE : UNH) announced today that William W . McGuire,MD, chairman and chief executive officer, and Stephen J .Hemsley, president and chief operating officer, haveexercised 1,900,000 and 800,000 stock options,respectively, and subsequently sold the underlying shares .

The exercises represent approximately 10 percent of theoptions held by each of Dr . McGuire and Mr . Hemsley .

60. On August 13, 2003, Defendants caused UNH to file its quarterly repor t

on Form 10-Q for the period ended June 30, 2003 with the SEC . The Form 10-Q, signed

by Defendant Hemsley, included UNH's financial results for the period ended June 30 ,

2003 and stated that UNH reported second quarter earnings per share of $0 .71 and second

quarter consolidated net earnings of $439 million . In addition, Defendant McGuire filed

a cert ification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 that stated in

part :

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this report;

56435.1 21

3 . Based on my knowledge, the financial statements, andother financial information included in this report, fairlypresent in all material respects the financial condition,results of operations and cash flows of the registrant as of,and for, the periods presented in this report ; . . .

5 . The registrant's other certifying officer and I havedisclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant's auditorsand the audit committee of the registrant's board ofdirectors (or persons performing the equivalent functions) :

a) all significant deficiencies and material weaknessesin the design or operation of internal control over financialreporting which are reasonably likely to adversely affectthe registrant's ability to record, process, summarize andreport financial information; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant's internal control over financialreporting .

61 . In its Notes [Note 2] To Condensed Consolidated Financial Statements ,

the second quarter 2003 Form 10-Q also contained the statement :

2 . Stock-Based Compensation


(Emphasis added . )

62 . On October 16, 2003, Defendants caused UNH to issue a press releas e

titled "UnitedHealth Group Reports Record Third Quarter Net Earnings Of $0 .77 Per

Share ." The press release stated that UNH reported third quarter earnings per share o f

56435A 22

$0.77 and consolidated net earn ings of $476 million .

63 . On November 14, 2003, Defendants caused UNH to file its quarterl y


10-Q, signed by Defendant Hemsley, included UNH' s financial results for the period


of $0.77 and third quarter consolidated net earn ings of $476 million. In addition ,

Defendant McGuire filed a certification pursuant to section 302 of the Sarbanes-Oxley

Act of 2002 that stated in part :

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this report ;

3. Based on my knowledge, the financial statements, andother financial information included in this report, fairlypresent in all material respects the financial condition,results of operations and cash flows of the registrant as of,and for, the periods presented in this report ; . . .




56435. 23

64. In its Notes [Note 2] To Condensed Consolidated Financial Statements ,

the third quarter 2003 Form 10-Q also contained the statement :



(Emphasis added . )

65. On January 22, 2004, Defendants caused UNH to issue a press releas e


$0.83 And $2 .96 Per Share ." The press release stated in part that UNH reported fourth

quarter earnings per share of $0 .83 and fourth quarter consolidated net earnings of $50 7

million and full year 2003 earnings per share of $2 .96 and consolidated net earnings o f

$1 .825 billion .

66. On March 15, 2004, Defendants caused UNH to file its Annual Report o n

Form 10-K for the year ended December 31, 2003 with the SEC . The Form 10-K , signe d

by Defendants McGuire and Hemsley, stated that UNH reported net earn ings of $1 .8

billion and diluted net earnings per common share of $2.96 for the year ended Decembe r

31, 2003 . It also stated that "We have prepared the consolidated financial statements

according to accounting principles generally accepted in the United States and have

included the accounts of UnitedHealth Group and its subsidiaries ." The report included a

Sarbanes-Oxley certification signed by Defendant McGuire that stated in part :

2. Based on my knowledge, this annual report does not

56435.1 24

contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made , not misleading with respect to the periodcovered by this quarterly report ;

3 . Based on my knowledge, the financial statements, andother financial information included in this report, fairlypresent in all material respects the financial condition,results of operations and cash flows of the registrant as of,and for, the periods presented in this report . . . .

5 . The registrant 's other certifying officer and I havedisclosed, based on our most recent evaluation of inte rnalcontrol over financial report ing , to the registrant ' s auditorsand the audit committee of the registrant 's board ofdirectors (or persons performing the equivalent functions) :

a) all significant de ficiencies and material weaknessesin the design or operation of internal control over financialreporting which are reasonably likely to adversely affectthe registrant's ability to record , process , summarize andreport financial information; and


67 . On April 12, 2004, Defendants caused UNH to file its Proxy Statemen t

Pursuant to Section 14(a) of the Securities Exchange Act of 1934 on Schedule 14A with

the SEC . The Proxy Statement stated in part that :

The Committee believes it is important to link a significantportion of Dr . McGuire's potential compensation to futureCompany performance. As part of his overallcompensation package, Dr. McGuire receives grants ofstock options from time to time . Pursuant to the terms ofhis employment agreement, in 2003 we granted Dr .McGuire an option to purchase 1,300,000 shares of ourcommon stock at an exercise price of $40 .12 per share,which was the fair market value of the stock on the grantdate . . . .

56435.1 25

Section 162(m) of the Internal Revenue Code generallydisallows a tax deduction to publicly held companies forcompensation exceeding $1 million paid to each of thecompany's chief executive officer and four other mosthighly compensated executive officers . Qualifyingperformance-based compensation will not be subject to thededuction limit if certain requirements are met. TheCompany's 2002 Stock Incentive Plan and the ExecutiveIncentive Plan are structured in a manner that we believecomplies with the statute's requirements . Accordingly, theCompany generally does not expect compensationassociated with stock options, stock appreciation rights orperformance awards issued under the 2002 Stock IncentivePlan, or compensation paid under the Executive IncentivePlan, to be subject to the deduction limit . The Companydoes not expect to take any further action with respect to itscompensation programs in order to avoid payingcompensation for which the Company would lose thecorresponding tax deduction .

68 . On April 16, 2004, Defendants caused UNH to issue a press release titled

"UnitedHealth Group Reports Record First Quarter Net Earnings of $0 .88 Per Share ."

The press release stated that LJNH repo rted first quarter earnings per share of $0 .88 and

consolidated net earn ings of $554 million.

69 . On May 7, 2004, Defendants caused LTNH to fi le its quarterly repo rt on

Form 10-Q for the period ended March 31, 2004 with the SEC. The Form 10 -Q, signed

by Defendant Hemsley, included UNII's financial results for the period ended March 31 ,


quarter consolidated net earn ings of $554 million, In addition, Defendant McGuire file d

a certification pursuant to section 302 of the Sarbanes -Oxley Act of 2002 that stated in

part :

2 . Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statement s

56435.1 26

were made , not misleading with respect to the periodcovered by this report ;





70 . In its Notes [Note 2] To Condensed Consolidated Financial Statements,

the first quarter 2004 Form 1.0-Q also contained the statement :



(Emphasis added . )


"UnitedHealth Group Reports Record Second Quarter Net Earnings of $0 .93 Per Share ."

56435.1 27

The press release stated that UNH reported second quarter earn ings per share of $0 .93


72. On August 9, 2004, Defendants caused UNH to file its quarterly report o n

Form 10-Q for the period ended June 30, 2004 with the SEC. The Form 10-Q, signed by

Defendant Hemsley, included UNH' s financial results for the period ended June 30, 200 4

and stated that UNH reported second quarter earn ings per share of $0 .93 and second


a certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 that stated in

part :

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this report ;

3 . Based on my knowledge, the financial statements, andother financial information included in this report, fairlypresent in all material respects the financial condition,results of operations and cash flows of the registrant as of,and for, the periods presented in this report : . . .



b) any fraud, whether or not material, that involvesmanagement or other employees who have a significan t

56435.1 28

role in the registrant's internal control over financialreporting .





(Emphasis added . )

74. On October 14, 2004, Defendants caused UNH to issue a press releas e


Share ." The press release stated that UNH reported third quarter earnings per share o f

$1 .04 and consolidated net earnings of $698 million .

75 . On November 9, 2004, Defendants caused UNH to file its quarterly report

on Form 10-Q for the period ended September 30, 2004 with the SEC. The Form 10-Q ,

signed by Defendant Hemsley, included UN -I's financial results for the period ende d

September 30, 2004 and stated that UNH reported third quarter earnings per share o f

$1 .04 and third quarter consolidated net earnings of $698 million, In addition, Defendant

McGuire filed a certification pursuant to section 302 ofthe Sarbanes-Oxley Act of 200 2

that stated in part :

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statements

56435.1 29

were made , not misleading with respect to the periodcovered by this quarterly report ;









(Emphasis added . )

77. On December 1, 2004, Defendants caused UNH to issue a press release

titled "UnitedHealth Group Announces Recent Executive Stock Transactions ." The pres s

56435.1 30

release stated in part that "William W . McGuire, MD, chairman and chief executiv e

officer, and Stephen J . Hemsley, president and chief operating officer, have exercise d

1,654,000 and 800,000 stock options, respectively, and subsequently sold the underlyin g

shares . The exercises represented less than 9 percent of the stock and options held by Dr .

McGuire and approximately 10 percent of the options held by Mr, Hemsley . "

78. On January 20, 2005, Defendants caused UNH to issue a press release

titled "UnitedHealth Group Reports Record Fourth Quarter And Full Year Earnings of

$1 .09 And $3 .94 Per Share ." The press release stated in part that UNH reported fourth

quarter earnings per share of $1 .09 and fourth quarter consolidated net earn ings of $739

million and full year 2004 earnings per share of $3 .94 and consolidated net earnings o f

$2.6 billion .

79. On March 1, 2005, Defendants caused UNH to file its Annual Report o n

Form 10-K for the year ended December 31, 2003 with the SEC . The Form 10-K, signed

by Defendant McGuire and Hemsley, stated that UNH reported net earnings of $2 . 6

billion and diluted net earnings per common share of $3 .94 for the year ended December

31, 2004. It also stated: "We have prepared the consolidated financial statement s

according to accounting principles generally accepted in the United States and have

included the accounts of UnitedHealth Group and its subsidiaries ." The report included a

Sarbanes-Oxley certification signed by Defendant McGuire that stated in part :

2 . Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly report ;

3 . Based on my knowledge, the financial statements, and

56435.1 31

other financial information included in this report, fairlypresent in all material respects the financial condition,results of operations and cash flows of the registrant as of,and for, the periods presented in this report; . . .


a) All significant deficiencies and materialweaknesses in the design or operation of internal controlover financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process,summarize and report financial information ; and

b) Any fraud, whether or not material , that involvesmanagement or other employees who have a significantrole in the registrant ' s internal control over financialreport ing .

80. On April 7, 2005, Defendants caused UNH to file its Proxy Statement

Pursuant to Section 14(a) of the Securities Exchange Act of 1934 on Schedule 14A with

the SEC . The Proxy Statement stated, in part, the following:

As part of his overall compensation package, Dr. McGuireis entitled to receive annually a grant of stock options topurchase at least 1,300,000 shares . Pursuant to the terms ofhis employment agreement, in 2004 the Company grantedDr. McGuire an option to purchase 1,300,000 shares ofcommon stock at an exercise price of $59 .40 per share,which was the fair market value of the stock on the grantdate . . .

Compliance with Internal Revenue Code Section 162(m)Section 162(m) of the Internal Revenue Code generallydisallows a tax deduction to publicly held companies forcompensation exceeding $1 million paid to each of theCompany's chief executive officer and four other mosthighly compensated executive officers . Qualifyingperformance-based compensation will not be subject to thededuction limit if certain requirements are met . TheCompany's 2002 Stock Incentive Plan and the Executiv e

56435.1 32

Incentive Plan are structured in a manner that we believecomplies with the statute's requirements . Accordingly, theCompany generally does not expect compensationassociated with stock options, stock appreciation rights orperformance awards issued under the 2002 Stock IncentivePlan, or compensation paid under the Executive IncentivePlan, to be subject to the deduction limit . The Companydoes not expect to take any further action with respect to itscompensation programs in order to avoid payingcompensation for which the Company would lose thecorresponding tax deduction . In the past, the Company hasfrom time to time issued stock option grants under priorstock option plans, which for various reasons will notqualify as "performance based compensation" underSection 162(m) of the Code . The Company does notexpect the deduction limitation with respect to such optiongrants to have a material effect on its operations orfinancial condition .

81 . On April 14, 2005, Defendants caused UNH to issue a press releas e

entitled, "UnitedHealth Group Reports Record First Quarter Net Earnings of $1 .16 Per

Share ." The press release stated that UNH reported first quarter earnings per share o f

$1 .16 and consolidated net earnings of $779 million .

82 . On May 5, 2005, Defendants caused UNH to file its quarterly report o n

Form 10-Q for the period ended March 31, 2005 with the SEC. The Form 10-Q, signed

by Defendant Hemsley , included UNH 's financial results for the period ended March 31 ,


quarter consolidated net earn ings of $779 million, In addition, Defendant McGuire file d

a certification pursuant to section 302 of the Sarbanes -Oxley Act of 2002 that stated in

part :

2 . Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the perio d

56435.1 33

covered by this report;




b) Any fraud, whether or not material , that involvesmanagement or other employees who have a significantrole in the registrant 's internal control over financialreporting .


the first quarter 2005 Form 10-Q also contained the statement :


We account for activity under our stock-based employeecompensation plans under the recognition and measurementprinciples of Accounting Principles Board Opinion No . 25,"Accounting for Stock Issued to Employees ."Accordingly, we do not recognize compensation expensewhen we grant employee stock options because we grantstock options at exercise prices not less than the fairmarket value of our common stock on the date of grant .

(Emphasis added . )

84. On July 14, 2005, Defendants caused UNH to issue a press release title d

"UnitedHealth Group Reports Record Second Quarter Net Earnings of $0 .61 Per Share ."

56435 .1 34

The press release stated that UNH repo rted second quarter earnings per share of $0 .6 1


85. On August 8, 2005, Defendants caused UNH to file its quarterly report o n

Form 10-Q for the period ended June 30, 2005 with the SEC. The Form 10-Q, signed by

Defendant Hemsley, included UNH's financial results for the period ended June 30, 200 5

and stated that UNH reported second quarter earnings per share of $0 .61 and second


a cert ification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 that stated in

part :

2 Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly report ;




b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significant

56435.1 35

role in the registrant ' s internal control over financialreporting .



2. Stock-Based Compensatio n


(Emphasis added . )

87. On October 14, 2005, Defendants caused UNH to issue a press release


Share ." The press release stated that UNH reported third quarter earnings per share of

$0.64 and consolidated net earnings of $842 million .

88 . On November 11, 2005, Defendants caused UNH to file its quarterl y


10-Q, signed by Defendant Hemsley, included UNH's financial results for the period


of $0.64 and third quarter consolidated net earnings of $842 million . In addition ,

Defendants McGuire filed a certification pursuant to section 302 of the Sarbanes-Oxle y

Act of 2002 that stated in pa rt :

2 . Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statement s

56435.1 36

were made, not misleading with respect to the periodcovered by this quarterly report ;




b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significantrole in the registrant's internal control over financialreporting .





(Emphasis added . )

90. On January 19, 2006, Defendants caused UNH to issue a press release


56435.1 37

$0.65 And $2 .48 Per Share ." The press release stated in part that UNH reported fourth

quarter earnings per share of $0 .65 and fourth quarter consolidated net earnings of $87 0

million and full year 2005 earnings per share of $2 .48 and consolidated net earnings of

$3 .3 billion .

91 . On February 24, 2006, Defendants caused UNH to file its Annual Repor t

on Form 10-K for the year ended December 31, 2005 with the SEC . The Form 10-K,

signed by Defendants McGuire and Hemsley, stated that UNH reported net earnings o f

$3 .3 billion and diluted net earnings per common share of $2 .48 for the year ended

December 31, 2005 . It also stated: "We have prepared the consolidated financia l

statements according to accounting principles generally accepted in the United States an d

have included the accounts of UnitedHealth Group and its subsidiaries ." The report

included a Sarbanes -Oxley certification signed by Defendant McGuire that stated in part :

2 . Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this report ;



a) All significant deficiencies and materialweaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to

56435 .1 38

adversely affect the registrant's ability to record, process,summarize and report financial information ; and

b) Any fraud , whether or not materi al, that involvesmanagement or other employees who have a signific antrole in the registrant 's internal control over financialreport ing .

92. In addition, the 2004 Form 10-K stated, in its notes to UNH's consolidated

financial statements :

Stock-Based Compensation

We account for activity under our stock-based employeecompensation plans under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees ."Accordingly, we do not recognize compensation expense inconnection with employee stock option grants because wegrant stock options at exercise prices not less than thefair value of our common stock on the date of grant .

(Emphasis added. )

93 . The statements referenced above in ¶¶ 34 -38, 40-58, 60 -76 and 78-92

were materially false and misleading when made because they misrepresented and/o r

omitted the following adverse facts, the disclosure of which was necessary to make the

statements made not false and/or misleading :

(a) That contrary to these consistent statements of UNH , its stock optio n

grants to the Individual Defendants and to other executives were not made at the fai r

market value of the stock on the actual grant date, but rather were improperly backdate d

to dates on which the price of UNIT common stock was lower than on the actual gran t

date ;

(b) That UNIX' s stock-based compensation expenses during the Class Perio d

were not recorded in accordance with Accounting Principles Board Opinion No . 25,

56435.1 39

"Accounting for Stock Issued to Employees" (APB 25) ;

(c) That if such expenses had been recorded properly UNH' s net income

would have been materially less for at least the years 2003 through 2005 ;

(d) That UNH did not comply with Section 162(m) ofthe Internal Revenue

Code because UNH treated certain stock option expenses as deductible , when, in fact ,

they were not entitled to such treatment under Section 162(m) ;

(d) That, accordingly, UNH improperly understated its expenses and

overstated its earnings ;

(e) That UNH's financial statements were not prepared in accordance wit h

GAAP;

(f) That UNH did not have adequate inte rnal controls with regard to

accounting for and reporting its stock option grants ; and

(g) That Defendant McGuire was in consistent violation of Section 302 of the

Sarbanes-Oxley Act because every one of his certifications was knowingly false .

THE TRUTH BEGINS TO EMERGE

94. As noted above, on March 18, 2006, The Wall Street Journal published a

story titled "The Perfect Payday - Some CEOs reap millions by landing stock option s

when they are most valuable; Luck - or something else?", that identified UNH as one o f

several companies "with wildly improbable option-grant patterns ." Working with several

academics, the Journal had gathered data and devised a method for determining the

likelihood that the option-grant history at the subject companies could have turned out so

"lucky" for the recipients by chance .

95 . In the March 18 article, the Journal specifically described the pattern of

56435.1 40

Defendant McGuire's option grants . The Journal, citing its own analysis as supporte d

by David Yermack, a finance professor at New York University , who had reviewed it s

methodology with regard to McGuire, stated: "[T]he odds of such a favorable pattern

occurring by chance would be one in 200 million or greater . Odds such as those are

"astronomical" . . ." [quoting Professor Yermack] .

96. However, as reported in the March 18 Journal article, UNH defended "the

process by which its grants were awarded [as] `appropriate"' and declined to answe r

specific questions about grant dates .

97. On April 7, 2006, the UNH filed its Proxy Statement Pursuant to Section

14(a) of the Securities Exchange Act of 1934 on Schedule 14A with the SEC. In it, it

stated, in part, the following:

In light of recent focus by the Securities and ExchangeCommission and others on stock option grant practices bypublicly traded companies, the Company's Chairman andChief Executive Officer recommended that the Board ofDirectors appoint a Committee comprised of independentdirectors to retain and work with outside legal counsel toreview the Company's current and historic stock optiongrant practices . The Board of Directors accepted thisrecommendation and formed a Committee of independentdirectors. The Committee has engaged independentcounsel to assist in its review. In response to a call fromthe staff of the Securities and Exchange Commission, theCompany has advised the staff of the appointment of theCommittee and counsel .

As stated by UNH, the issues being reviewed by the special committee were related to a

shareholder derivative lawsuit filed in March challenging the backdated option grants on

behalf of UNU .

98. In the 2006 Proxy Statement, Defendants caused UNH to repeat part of the

false and misleading statement about the income tax treatment of its compensation plan :

56435.1 41

Compliance with Internal Revenue Code Section 162(m)Section 162(m) of the Internal Revenue Code generallydisallows a tax deduction to publicly held companies forcompensation exceeding $1 million paid to each of theCompany's chief executive officer and four other mosthighly compensated officers . Qualifying performance-based compensation will not be subject to the deductionlimit if certain requirements are met. The Company's 2002Stock Incentive Plan and Executive Incentive Plan arestructured in a manner that we believe complies with thestatute's requirements . Accordingly, the Companygenerally does not expect compensation associated withstock options . . . issued under the 2002 Stock IncentivePlan . . . to be subject to the deduction limit . The Companydoes not expect to take any further action with respect to itscompensation programs in order to avoid payingcompensation for which the Company would lose thecorresponding tax deduction . . . .

99. As the market absorbed the negative news in UNH's April 7, 2006 Prox y

Statement , the market price of UNH common stock slid down from its closing price of

$54.41 on April 6 to a closing price of $51 .55 on April 11 .

100. Reporting on this development on April 10, 2006, The Wall Street Journal

stated that a committee of independent UNH directors would review its stock option

grant practices in light ofrecent scrutiny of options grants by the SEC and other parties .

The Journal stated that :

The SEC is engaged in a broad look at options at a numberof companies, focusing on whether options grants werebackdated to give recipients a better chance of profitingfrom them. UnitedHealth said it had received an inquiryfrom the SEC and had advised the agency of its internalreview .

Mark Lindsay, a UnitedHealth spokesman, over theweekend reiterated an earlier statement by the companythat the process by which grants were awarded was"appropriate" and added, "we have no concerns aboutlooking into matters raised by regulators to confirm that ourpractices were appropriate . "

56435 .1 42

The article also noted that the provision in McGuire's employment contract allowing hi m

to pick his own grant dates had continued until 2005 .

101 . On April 17, 2006, The Wall Street Journal online edition published an

article headlined : "UnitedHealth Option Grants Raise Questions ." In the article, the

Journal analyzed in further detail the UNH option grants to the Individual Defendant s

and to nine other UNH top executives . It stated that , for instance, in 2000 at least eleven

UNH executives, including Defendant McGuire, received grants dated at the lowest daily

closing price of the first or third quarters of the year .

102 . The market price of UNH common stock closed on April 17 at $51 .67 ,

down almost two dollars per share from the prior close on April 16 of $53 .50 .

103 . On April 19, 2006, The Wall Street Journal reported that Defendan t

McGuire had recommended that UNH suspend the use of options for executive pay . As

the Journal noted :

Dr. McGuire made his recommendation amid scrutiny ofthe circumstances under which he obtained some of the$1 .6 billion in unrealized gains he holds in UnitedHealthstock options. He and in some years 10 other topexecutives of the company frequently received options justbefore big run-ups in the company's share price, which hadthe effect of making the options more profitable than theyotherwise would have been .

The Journal noted that since 1995 McGuire had realized at least $450 million by

exercising options and stock-appreciation rights .

104. Notably, Dr. McGuire has not suggested that the vast number of options

already issued to him and other UNH executives (and already exercisable in his case i n

the amount of over $1 .6 billion) be cancelled . Indeed, certain of the plaintiffs in th e

56435 .1 43

shareholder derivative litigation mentioned above have moved for a preliminary

injunction seeking, among other relief, to prevent the exercise of such options .

105 . On May 11, 2006, UNH filed its quarterly report on Form 10-Q for th e

quarter ended March 31 , 2006 with the SEC . In the first quarter 2006 Form 10-Q, UNH

stated the following :

In March 2006, the Company and its board of directorsinitiated separate internal and independent reviews of theCompany's stock option granting practices from 1994 tothe present . The reviews encompass all option grants madeunder the Company's various stock option plans in effectduring this period .

. . . These reviews are continuing and neither the SpecialCommittee nor the Company has reached final conclusions .

The results of the review to date indicate that theCompany may be required to record adjustments tonon-cash charges for stock-based compensation expensein periods prior to January 1, 2006, in accordance withAccounting Principles Board Opinion No . 25,"Accounting for Stock Issued to Employees" (APB 25) .Any such charges could be material and, in such event,would require restatement of the Company's historicalfinancial statements prepared in accordance with APB25.

If any such non-cash adjustments were deemednecessary it may also result in compensation related tocertain exercised stock options, previously thought to bedeductible, to be nondeductible under Section 162(m) ofthe Internal Revenue Code. In that event the Companymay be required to pay additional taxes and interestassociated with deductions it previously took forcompensation associated with such exercised stockoptions and the Company may lose additionaldeductions in future periods . . . .

(Emphasis added . )

106. In the Form 10-Q, UNH estimated that the maximum potential impact o f

56435 .1 44

the matters under internal review, under the historical APB 25 basis of accounting, on it s

financial statements to be :

(a) a reduction of net earnings for 2005 of $150 million, or $0 .11 per share ,

approximately 4 .5% ;

(b) a reduction of net ea rn ings for 2004 of $ 84 million, or $0 .06 per share ,

approximately 3 .2%; and

(c) a reduction of net earnings for 2003 of $52 million, or $0 .04 per share ,

approximately 2 .8 % .

107. In the Form 10 -Q, UNH also stated that the SEC was conducting an

informal investigation into its stock option granting practices and that at the conclusion of

the SEC' s inquiry UNH could be subject to regulatory fines or penalties or othe r

contingent liabilities .

108. UNH further stated in the Form 10-Q :

The Company has iden tified a significant deficiency inits controls relating to stock option plan administrationand accounting for and disclosure of stock optio ngrants .

(Emphasis added.) The 10-Q also stated that on May 1, 2006, its Board of Directors ha d

taken a number of measures to "further strengthen our controls by establishing . . .

[several new ] policies relating to stock option grants . "

109. It further stated in the Form 10-Q :

In light of the conclusions in its internal review to date, theCompany is re-evaluating the Report of Management onInternal Control Over Financial Reporting as of December31, 2005 set forth in the Company's Annual Report onForm 10-K for the fiscal year ended December 31, 2005[filed with the SEC on February 24, 2006] .

56435,1 45

110. On May 11, 2006, shares of UNH declined $1 .80 per share from the

previous trading day's close of $46 .17, to close at $44 .37 per share, a decline of

approximately 4%, on heavier than usual volume. As The Wall Street Journal noted on

May 12, 2006:

Since questions were raised about UnitedHealth'soptions-granting practices in mid-March, its shareshave dropped 22%, shedding almost $17 billion inmarket value .

(Emphasis added .) The Journal further quoted James Cox , a professor of corporate and

securities law at Duke University, as saying : "Quite frankly, this isn't just a li ttle

material . This is a lot material for this kind of issue ."

111 . The market price of UNH common stock has never recovered .

112. On May 18, 2006, The Wall Street Journal reported (summarizing a UNH

press release dated May 17, 2006) that federal prosecutors in the Southern District o f

New York had begun a criminal investigation of UNIPs option granting practices and

had issued it a subpoena dating back to 1999 . It also reported that the Internal Revenue

Service had requested documents from UNH relating to stock options and othe r

compensation going back to 2003 .

LOSS CAUSATION

113 . As detailed above, when Defendants' prior misrepresentations wer e

disclosed and became apparent to the market , the price of UNH stock fell precipitously as

the prior artificial inflation came out of UNH's stock price . The decline in UNH's stock

price at the end of the Class Period was a direct result of the nature and extent o f

Defendants' fraud finally being revealed to investors and the market . The timing and

magnitude of UNH' s stock price declines negate any inference that the loss suffered by

56435.1 46

Plaintiff and other Class members was caused by changed market conditions ,

macroeconomic or industry factors, or UNH-specific facts unrelated to Defendants '

fraudulent conduct . It demonstrates that Defendant' s misconduct caused economic har m

to Plaintiff and the Class .

FRAUD-ON-THE-MARKET DOCTRINE

114. At all relevant times, the market for UNH common stock was an efficient

market for the following reasons, among others :

(a) UNH' s common stock met the requirements for public listing and was

listed and actively traded on the NYSE, a highly efficient market ;

(b) UNH filed periodic reports with the SEC ;

(c) UNH regularly issued press releases that were carried by national news

wires .

(d) UNH was followed and reported on by numerous securities analysts .

115. Accordingly, a presumption of reliance applies to the Class members '

purchases of UNH common stock .

ADDITIONAL SCIENTER ALLEGATION S

116. As described above, the routine backdating of option grants to the mos t

favorable false "grant" dates could not have occurred by chance. Rather, it wa s

necessarily the deliberate, conscious and intentional action of UNH top management ,

including the Individual Defendants .

117. Further, the Individual Defendants had both motive and opportunity t o

engage in the fraudulent activity that is the subject of this complaint. Their motive i s

obvious: they were the primary beneficiaries of the backdating, benefiting from the

56435 .1 47

scheme by hundreds of millions of dollars . Their opportunity was equally obvious : as the

two top executives of UNI I, they controlled its actions at the highest level. McGuire's

opportunity was even stronger : his employment contract with UNH for almost the

entirety of the Class Period permitted him to designate the date on which his option s

would be granted .

118 . In addition, as described above in Paragraphs 8 and 9, McGuire and

Hemsley sold millions of UNH shares during the Class Period at artificially inflated

prices .

FIRST CLAIM FOR RELIEF

For Violation Of Section 10(b) Of The Exchange ActAnd Rule 10b-5 Against All Defendants

119 . Plaintiff incorporates ¶¶ 1-118 by reference .

120 . During the Class Period, Defendants disseminated or approved the fals e

statements specified above , which they knew or recklessly disregarded were materially

false and misleading in that they contained material misrepresentations and failed to

disclose material facts necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading .

121 . Defendants violated Section 10(b) of the 1934 Act and Rule 10b-5 in tha t

they :

(a) Employed devices, schemes and artifices to defraud ;

(b) Made untrue statements of material facts or omitted to state material fact s

necessary in order to make statements made, in light of the circumstances under which

they were made not misleading ; and/or

(c) Engaged in acts, practices, and a course of business that operated as a

56435.1 48

fraud or deceit upon Plaintiff and the other members of the Class in connection with their

purchases of UNH common stock during the Class Period .

122. Plaintiff and the other members of the Class have suffered damages i n

that, in reliance on the integrity of the market, they paid artificially inflated prices for

UNH's common stock . Plaintiff and the other members of the Class would not hav e

purchased UNH common stock at the prices they paid, or at all, if they had been aware

that the market prices had been artificially inflated by Defendants' misleading statements .

SECOND CLAIM FOR RELIEF

For Violation Of Section 20(a) Of The Exchange ActAgainst The Individual Defendants

123 . Plaintiff incorporates ¶¶ 1-122 by reference .

124. As controlling persons of UNH, who had the power to control the publi c

statements of UNH detailed above and who culpably exercised that power, the Individual

Defendants are liable to Plaintiffs and the Class under Section 20(a) of the Exchange Act

for UNH' s violations of Section 10(b) and Rule 1 Ob-5 .

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for judgment as follows :

(a) declaring this action to be a proper class action;

(b) awarding damages to Plaintiff and the Class, including interest ;

(c) awarding reasonable costs ; and

(d) awarding such further equitable and/or injunctive relief as the Court may

deem proper.

JURY DEMAND

Plaintiff demands a trial by jury .

$6435. 49

Dated : June 2, 2006

80 South Eighth StreetMinneapolis, MN 55402Tel: 612 338-4605Fax: 612 338-469 2

LAW OFFICE OF KLARI NEUWELT110 East 59th Street , 29th FloorNew York, NY 10022Tel: 212 593-8800Fax: 212 593-913 1

Attorneys for Plaintiff

56435 .1 50

Bryan L . Crawford (0166819)Brian L . Williams (23249X)Lori A . Johnson (0311443)3550 IDS Center

CERTIFICATION

Ruth Polishook declares the following under penalty o f

perjury :

2_ T did not purchase or acquire the securities that are

the subject at the complaint (common stock of UnitedHealth Group

Inc .) at the direction of plaintiff's counsel or in order to

participate in any private action for securities fraud .

3 . I am willing to serve as a representative party on

behalf of a class, including providing testimony at deposition

and trial, if necessary .

4 . My transactions UnitedHealth Group Inc . securities

during the class period specified. in the complaint (May 15, 2001

through May 10, 2006) were as follows ;

Trade Date Purchase( P)/Sale ( S) No . of Shares Price per Share

authorize its filing-

1 . 1 have reviewed the complaint in this action an d

11/16/05

1/27/06

4/13/06

5/9/06

P 50

P 25

p 15

S 45

$60 .24

$58 .59

$52 .42

$44 .2 5

5 . T have not sought to serve as a representative in any

class or other representative actions filed under the federal

securities laws during the last three-year period .

6 . 1 will not accept any payment for serving as a

1

representative party on behalf of a class other than my pro rata

share of any recovery, except as ordered or approved by the

Court _

Dated: May q , 200 6

uth Polishook

2

ruth polishook, et al. v. unitedhealth group, inc., et al...

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