More problems with stock options

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UnitedHealth Group Inc. may have to [tag]restate[/tag] some financial data as a result of [tag]improper accounting[/tag] related to the grant of [tag]stock options[/tag]. All told, the changes and loss of some tax benefits may mean a reduction of $286 million in profits from the last 3 years. The year hit hardest by the changes will be 2005, when the company said net earnings would drop by $150 million.

The SEC has been conducting an informal inquiry into the company’s accounting practices regarding stock options. The inquiries are looking into whether companies have been backdating or timing stock option grants to take advantage of favorable market prices. Executive stock options usually have a “strike price”, equal to the market value on the date of the grant. If the stock rises above the strike price, the executive cashes in the options at a profit.

The stock options at UnitedHealth were issued immediately after steep declines in stock price, but just prior to significant run-ups in share prices. This means that executives received options with extremely low exercise prices, and therefore more profit once they’re cashed in.

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