Five HealthSouth Officers Face Fraud Charges-Investigation Shows Inflated Profits at the Nation’s Largest For-profit Hospital Chain

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Five HealthSouth Corp. executives pleaded guilty Thursday to accounting fraud charges in federal court, bringing the total to eight executives charged in an investigation examining improperly inflated profits at the nation’s largest for-profit hospital chain.

Separately on Thursday, HealthSouth said it would eliminate 165 employees at its corporate headquarters. The company employs some 3,500 people in Birmingham, Ala., including 830 at its headquarters.


The job cuts were the first since federal regulators charged HealthSouth and Scrushy on March 19 with civil accounting fraud for allegedly overstating earnings by $1.4 billion since 1999. The company’s assets also were overstated by at least $800 million by the third quarter of last year, the Securities and Exchange Commission said.

HealthSouth declined to say how much money the job cuts would save the company.

“As the company gets back to the basic business of healthcare, it continues to assess resources and expenditures that do not directly impact patient care,” it said in a statement.

Meanwhile, U.S. Attorney Alice H. Martin said Ken Livesay, 42, who is HealthSouth’s chief information officer, was charged with conspiring with senior officers to artificially inflate the company’s earnings and the value of its assets.

Charges were also filed against vice presidents Angela C. Ayers, 33, and Cathy C. Edwards, 39, as well as group vice president Rebecca Kay Morgan, 35, and assistant vice president Virginia B. Valentine, 33.

The executives pleaded guilty to fraud and other charges in Birmingham federal court and will agree to cooperate with the government, Martin said.

“These accounting executives carried out the orders of superiors in the accounting department at HealthSouth,” she said. “Today they face the consequences of these illegal actions.”

HealthSouth spokesman Andy Brimmer told United Press International when employees enter their guilty pleas they are terminated.

Former chief financial officers Weston Smith and William Owens, and former assistant controller Emery Harris recently pleaded guilty to similar charges.

Scrushy, who was fired Monday as chairman and chief executive officer, has not been charged with any crime. But Martin said indictments would likely go beyond the accounting department.

All five executives were charged with overbooking reserve accounts, which could later be bled out into revenue; creating fictitious entries in the fixed assets system, and overstating intangible assets, or goodwill.

Martin said Ayers, Edwards, Morgan and Valentine were each charged with participating in the conspiracy, and with making false reports on the company’s financial condition. The charges filed Thursday also allege that a conspiracy existed from 1994 until this year.

On Wednesday, Standard & Poor’s cut its long-term debt ratings on HealthSouth to default, citing the company’s failure to pay off $345 million of the convertible bonds due on Tuesday.

S&P cut HealthSouth’s corporate credit and senior unsecured ratings to default from “CCC-minus” and its subordinated debt rating to default from “CC.”

The company said on Thursday National City Bank informed holders of two series of senior notes that HealthSouth failed to make a $21.2 million interest payment due April 1.

In a filing with the Securities and Exchange Commission, failure to make the payment within a 30-day grace period on the 7-3/8 percent senior notes due 2006 and our 8-3/8 percent senior note due 2011 will lead to an event of default.

HealthSouth had also failed to repay about $350 million of convertible bonds that were due April 1 after the company’s $1.25 billion credit line was frozen.

The company was founded in 1984, and went public as a result of an initial public offering in 1986. The company’s common stock was previously listed on the New York Stock Exchange under the symbol “HRC.”

Shares of HealthSouth gained 1 cent, or 9.09 percent, to close Thursday at 12 cents per share on moderate volume of 177,937 shares in over-the-counter trading.

HealthSouth is the nation’s largest provider of outpatient surgery, diagnostic and rehabilitative service. The company operated approximately 1,700 locations in 50 states, Puerto Rico, the United Kingdom, Canada and Australia.

Copyright 2003 by United Press International. All rights reserved.