HealthSouth Charged with $1.4 Billion Fraud

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WASHINGTON, March 19 (UPI) — The government charged HealthSouth Corp. and Richard M. Scrushy with civil accounting fraud Wednesday, accusing the nation’s largest for-profit hospital chain and its chairman and chief executive officer of overstating its earnings by $1.4 billion since 1999.

In a complaint filed in federal court in Birmingham, Ala., the Securities and Exchange Commission alleged that at the insistence of Scrushy, the company overstated its earnings in order to meet or exceed Wall Street earnings expectations.


The company’s assets were overstated by at least $800 million — or 10 percent — by the third quarter of last year, the commission said. The false increases in earnings were matched by false increases in the company’s assets, the commission said.

“HealthSouth’s standard operating procedure was to manipulate the company’s earnings to create the false impression that the company was meeting Wall Street’s expectation,” said Stephen M. Cutler, the SEC’s director of enforcement.

Cutler also called the charges an “appalling betrayal of investors.”

The SEC suspended trading in the company for two days. When halted, shares of HealthSouth were trading at $3.91 on the New York Stock Exchange. The company’s stock Wednesday was trading near its 52-week low of $2.79, after reaching a 52-week high of $15.90.

Standard & Poor’s, the credit rating agency, on Wednesday said it cut HealthSouth’s debt rating three notches to “B-minus,” its sixth highest “junk” grade.

Meanwhile, the Justice Department said a former chief financial officer at HealthSouth would plead guilty to criminal fraud charges.

In a statement released early Wednesday, the Birmingham, Ala., -based company said it continues to cooperate with authorities in their investigation.

“The recent events at HealthSouth’s corporate office does not affect our ability to provide quality patient care,” a company spokesman told United Press International late Wednesday. “Our operations across the country continue uninterrupted.”

The government’s complaint alleges that HealthSouth had been overstating earnings at Scrushy’s asking since the company went public in 1986, two years after he founded the company. The SEC said that even when senior executives periodically tried to persuade him “to abandon the scheme,” he refused, once saying “not until I sell my stock.”

Scrushy, 49, has sold at least 7.7 million shares since 1999, the complaint said. He also received a $6.5 million bonus payment on inflated returns in 2001.

He founded HealthSouth and was chief executive officer from 1994 until Aug. 27, 2002. He returned to his post as CEO in January.

The Justice Department said the company’s former chief financial officer, Weston Smith, has agreed to plead guilty to securities fraud, conspiracy to commit securities and wire fraud, as well as false certification of financial records that were designed to inflate the company’s revenues and earnings by hundreds of millions of dollars.

Smith, 42, of Hoover, Ala., has agreed to cooperate with the federal government’s investigation, the Justice Department said.

The maximum sentence for conspiracy is five years in prison and a $250,000 fine. Smith also faces a maximum sentence of 10 years in prison and a $1 million fine on the charge of securities fraud, as well as a maximum sentence of 10 years in prison and $1 million fine on the charge of filing false certification with the SEC.

“This case demonstrates the Justice Department’s commitment to real-time enforcement in corporate fraud cases,” said Deputy Attorney General Larry Thompson. “We will move swiftly in our efforts to root out corporate fraud and restore investor confidence in the marketplace.”

The charges came a day after FBI agents served a search warrant at the company’s headquarters and were given access to current and historical financial records and other materials.

HealthSouth is the nation’s largest providers of outpatient surgery, diagnostic and rehabilitative services. The company operated approximately 1,900 locations in 50 states, Puerto Rico, the United Kingdom, Canada and Australia.

Copyright 2003 by United Press International. All rights reserved.