Oct. 17 (Bloomberg) -- William McGuire, chief executive officer of UnitedHealth Group Inc., may face criminal charges for reaping $333 million from stock options that might have been backdated to raise their value, say former securities regulators not involved in the case.

McGuire, 59, was ``central to'' a process that set many option dates ``at or near'' the lowest price in a quarter or year, raising his potential profit over 12 years, said a law firm retained by Minnetonka, Minnesota-based UnitedHealth, the largest U.S. health insurer. McGuire agreed to step down as CEO by Dec. 1, and resigned as chairman.

The probe found that ``certain facts run contrary'' to McGuire's assertion to the law firm that the pricing dates were set in advance. The report, released Oct. 15, may expose McGuire to civil or criminal charges by the U.S. Securities and Exchange Commission, the U.S. Department of Justice and the Minnesota Attorney General, securities lawyers said.

``Clearly the dollar value, the number of grants and the number of options are such that any agency, state or federal, with civil or criminal authority is likely to take a keen interest,'' said Jacob Frenkel, a former SEC enforcement lawyer who is now an attorney at Shulman, Rogers, Gandal, Pordy & Ecker in Rockville, Maryland.

The company also faces shareholder lawsuits that may be strengthened by the report, said Karl Cambronne, a lead attorney in a derivative class-action lawsuit against UnitedHealth, in an interview on Bloomberg television.

``This is sure to add fire to a number of lawsuits,'' Cambronne said in an interview Oct. 16.

Moody's Downgrade

In response to the law firm's findings, Moody's Investors Service today downgraded the company's long-term debt rating to A3 from A2, and its short-term debt to P-2 from P-1. About $7.4 billion of borrowings are affected. The outlook remains ``negative.''

Moody's also downgraded the insurance financial strength of the company's main operating unit, United HealthCare Insurance Co., to A1 from Aa3.

``These are not issues that have quick fixes and will require a cultural change at the board of directors and senior management level, which will take some time to accomplish,'' said Stephen Zaharuk, a Moody's vice president, in a statement.

Further Downgrades

Moody's said it isn't concerned about the change in senior leadership, as the management team has ``deep bench strength.'' If more than $2 billion in additional costs for regulatory, tax or litigation activities are recorded, or if fraud or criminal wrongdoing are found, the ratings would likely be further downgraded, Moody's said.

The law firm's report on UnitedHealth's options may also make it easier and faster to build a criminal case against McGuire, said Christopher Bebel, a former SEC lawyer who works in private practice as a securities attorney in Houston.

``The report will speed things up by serving as a road map for federal prosecutors'' and the SEC, Bebel said in a telephone interview yesterday. ``It is also certain to be used against the company in connection with shareholder lawsuits.''

McGuire's Benefits

McGuire stands to walk away from the company with almost $1.1 billion in stock options, retirement and other benefits, including a pension that pays a lump sum of $6.4 million upon retirement and $5.1 million a year for life, the Wall Street Journal reported today.

Terms of McGuire's employment agreement, signed in 1999 and amended in 2005, classify just about any departure short of firing as a retirement, allowing him to vest nearly all his options immediately and to draw his pension, the Journal wrote.

The contract also restricts grounds for firing to a felony conviction or repeated failure to fix a serious problem he was told to resolve, the Journal said.

McGuire's lawyer, David M. Brodsky, an attorney at Latham & Watkins in New York, declined to comment in a telephone interview yesterday. UnitedHealth spokesman Mark Lindsay also declined to comment.

UnitedHealth's shares fell 81 cents, or 1.7 percent, to close at $46.73 in New York Stock Exchange composite trading. The stock has fallen 24 percent this year.

The law firm's report noted one grant of 1 million options, dated Oct. 13, 1999, which coincided with the lowest share price of the year. ``Those option grants were likely backdated,'' said the report by Washington-based Wilmer, Cutler, Pickering, Hale and Dorr LLP.

Hemsley's Options

Stephen Hemsley, 53, who will replace McGuire as chief executive officer, also received options on Oct. 13 covering 500,000 shares. The law firm's report said Hemsley had ``little or no role'' in negotiating that award.

Minnesota Attorney General Mike Hatch said yesterday that he's investigating the options grants. He declined to comment on when, or whether, criminal charges might be filed. SEC spokesman John Nester declined to comment, and calls to the Department of Justice weren't returned.

Hemsley, UnitedHealth's president and chief operating officer, and other UnitedHealth executives will reset the prices of their stock options to the annual high for each year, the company said in an Oct. 15 statement.

`Dated Memos'

In the WilmerHale report, McGuire stated that grant dates on the CEO's options ``typically coincided with'' a memo, phone call, meeting or discussion with at least one member of the board's compensation committee.

The report's authors responded that there were ``relatively few instances in which there are either direct or circumstantial evidence to establish that a grant date was selected on that particular day.''

E-mails and memos about options grants written by McGuire, and ``dated on or after the claimed grant date, speak in tentative or prospective terms about a grant that `should be awarded' and include specific recommendations concerning the amount of grants to specific officers,'' the report said.

Often, ``the first written mention of either the grant date or the corresponding price'' appears ``weeks after the grant date, and in at least one instance, the first mention of a date or price for a grant was almost one month after the grant date,'' the report said.

Potential for Charges

``United can absolutely still be on the hook for criminal charges,'' even though the company released the report and removed McGuire, said Michael Koenig, a former federal prosecutor and now a defense attorney at Dewey Ballantine in Washington, in a telephone interview yesterday.

``A company that comes forward quickly and decisively can put itself in a better light,'' Koenig said. ``For a company that is absolutely rampant with corruption, cooperation will mitigate the circumstances but not wipe the slate clean.''

McGuire is the most visible CEO to leave his job in the continuing probe into options-granting practices at U.S. companies, and UnitedHealth is the largest company to be caught up in the scandal.

At least 144 companies are conducting internal investigations or are subject to government probes on the matter. Executives at two companies, Brocade Communications Systems Inc. and Comverse Technology Inc., have been charged by federal authorities with securities fraud. At least 30 executives and directors have left their jobs, and hundreds of lawsuits have been filed.

More than 60 companies have revised or restated earnings as a result of the investigations.

To contact the reporters on this story: Duncan Moore in Chicago at dmoore35@bloomberg.net; Lisa Rapaport in New York at Lrapaport1@bloomberg.net

Last Updated: October 17, 2006 16:21 EDT