Thursday, March 20, 2003

HealthSouth, chairman accused of massive fraud

By Jay Reeves
The Associated Press

BIRMINGHAM, Ala. - HealthSouth Corp. and its chairman, Richard Scrushy, were accused Wednesday of a massive accounting fraud that the government said inflated reported profits by at least $1.4 billion to mislead investors that the health care giant was keeping pace with Wall Street's expectations.

Acting on Scrushy's orders to "fix" earnings, senior accountants gathered in what they called "family meetings" to falsify results when HealthSouth's performance failed to meet Wall Street forecasts, according to a complaint by the Securities and Exchange Commission.

• The HealthSouth Northern Kentucky Rehabilitation Hospital in Edgewood. The facility on Medical Village Drive has about 120 employees and admits almost 14,000 patients a year.
• A surgery center is operated with Deaconess Hospital at the Bethesda North medical campus in Montgomery; a diagnostic center is located on another floor of the same building. Another surgery center is located at Mercy Fairfield Hospital. A third is located in Avondale, near University Hospital.
• Sports medicine and rehabilitation centers are located in Mason, Montgomery, Springdale, University Heights (near Deaconess Hospital) and Wyoming. A center that offers rehabilitation only is located in Crestview Hills.
• An endoscopy center is located on Werk Road in Green Township.
With the complaint, trading in the company was halted for two days, and the Justice Department announced the company's former chief financial officer had pleaded guilty to securities fraud charges and was cooperating in a continuing probe.

HealthSouth was rocked last August when it announced a Medicare billing change would hurt its earnings significantly. That sent its stock price plummeting and led to suits claiming in part that Scrushy knew of the Medicare change's impact when he sold half his stake in the company a few weeks before the public announcement.

The government charged that HealthSouth's August warning about the Medicare change really was a Scrushy-approved "scheme" to lower analysts' expectations. "HealthSouth's fraud represents an appalling betrayal of investors," said Stephen M. Cutler, SEC enforcement director.

The company reported income before taxes of $1.6 billion from 1999 through June 30, 2002, but it really made only $169 million, according to the SEC complaint.

HealthSouth bond prices fell sharply with the announcement, an analyst said, indicating the company could be in danger of default because of difficulty raising capital.

"We would like to see the board of directors step up and disassociate the company from Mr. Scrushy," said Premila Peters, a of KDP Investment Advisors, a credit analysis firm in Montpelier, Vt.

HealthSouth is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services, with 1,700 centers in all 50 states and abroad.

The SEC made the accusations in a civil suit filed in federal court in Birmingham, where HealthSouth's headquarters is located.

The government asked the court to make HealthSouth and Scrushy repay any "ill-gotten gains" and to pay unspecified civil penalties. It also sought an order barring Scrushy from acting as a director of any publicly held company and freezing his assets.

HealthSouth spokeswoman Kristi Gilmore said the company had no immediate comment.

HealthSouth, founded by Scrushy and a few friends in 1984, has denied wrongdoing in the past. It said it was cooperating with the investigation.

The SEC complaint said HealthSouth had issued fake earnings at Scrushy's instruction since 1986.

The firm's assets were overstated by at least $800 million - or about 10 percent - by the third quarter of last year, the SEC said.

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