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Panel Asks UBS Warburg For HealthSouth Papers

May 9, 2003 | Washington Post

The House Energy and Commerce Committee demanded yesterday that investment-banking giant UBS Warburg turn over hundreds of documents as part of the committee's investigation into alleged wrongdoing at HealthSouth Corp.

The committee plans to examine whether UBS Warburg and other investment bankers had a too-cozy relationship with HealthSouth that may have caused them to overlook the health care company's problems, according to a letter sent yesterday to UBS chairman and chief executive John Costas.

The committee asked UBS Warburg for documents relating to the firm's two top investment bankers on the HealthSouth account, Benjamin D. Lorello, who continues at the firm, and William McGahan, who resigned last month for what the company said were personal reasons.

"UBS Warburg's primary analyst on health care companies, Howard Capek, continued to rate HealthSouth's stock favorably and to encourage investors to buy its shares," even after HealthSouth's 2002 earnings shortfall and a possible Securities and Exchange Commission investigation were disclosed, the letter said.

UBS spokeswoman Denise Kazmier said: "Like everyone else, UBS Warburg was shocked and dismayed to learn of the accounting fraud that took place at HealthSouth. Of course the firm will cooperate fully with the request." She said that Lorello would not be available for comment. McGahan could not be reached for comment.

In March the SEC charged HealthSouth and Richard M. Scrushy, its former chief executive, with civil securities fraud for allegedly overstating the company's earnings by at least $1.4 billion since 1999.

"Were investors defrauded by analysts who were more concerned about getting rich quick than getting the facts right? Based on our interviews with a key whistle-blower, there was an incestuous relationship between top HealthSouth officials and a small group of investment bankers and analysts," said Ken Johnson, spokesman for Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.). Among the allegations that an unidentified whistle-blower has made is that a UBS Warburg investment banker was so close to top HealthSouth managers that he had an office and a computer at the company's Birmingham headquarters.

UBS Warburg, owned by Swiss bank UBS AG, was one of 10 Wall Street firms to sign a $1.4 billion agreement to settle state and federal charges that they misled investors because of conflicts of interest that caused them to issue misleading stock research to win investment-banking business.