HealthSouth Charged In $1.4B Fraud

The government charged rehabilitation giant HealthSouth Corp. and chairman Richard Scrushy with civil accounting fraud Wednesday, accusing the company of overstating earnings by at least $1.4 billion since 1999.

The Securities and Exchange Commission, which filed the charges in federal court in Birmingham, suspended trading in the company for two days.

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

The Birmingham-based company inflated its results at Scrushy's insistence to make it appear it was meeting or exceeding Wall Street expectations, the commission said in a statement.

The company's assets were overstated by at least $800 million — or about 10 percent — by the third quarter of last year, the SEC 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, SEC enforcement director.

HealthSouth spokeswoman Kristi Gilmore said the company had no immediate response to the charges. It has denied wrongdoing in the past.

The 19-page SEC complaint said HealthSouth had been overstating earnings at Scrushy's instruction since it went public in 1986, two years after he founded the company.

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

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

HealthSouth is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services.

The charges came a day after FBI agents served search warrants and interviewed workers at HealthSouth headquarters, and were given access to financial records and other materials.

Two agents turned visitors away at the gate Tuesday as other agents worked inside the building. Its shares finished at $3.91 a share Tuesday on the New York Stock Exchange.

In February, the FBI served the company with subpoenas and questioned employees in connection with share sales by executives and board members.

The sales were made before the company said in August that profits would fall because of reduced payments from Medicare. Scrushy had sold half his stake in the firm -- some $25 million worth of stock -- a few weeks before.

HealthSouth had a loss of $406 million in the fourth quarter. The company operates 1,700 outpatient surgery, diagnostic imaging and rehabilitation centers in all 50 states and abroad.

The company faces lawsuits in Delaware and in Jefferson County Circuit Court, and at least 17 investor lawsuits in U.S. District Court in Birmingham seeking monetary damages for stockholders.

Scrushy had issued a statement earlier this year saying that company officials did not believe that HealthSouth or anyone associated with it had done anything wrong.

"We have cooperated with all requests for information from government authorities and we will continue to do so," the company said in that statement.