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Employees Sue HealthSouth

Class action filed for thousands in retirement plan

Apr 5, 2003 | Birmingham News A lawsuit filed Friday claims HealthSouth employees lost money in the company's retirement plan because of accounting fraud the government said was orchestrated by the company's top executives.

The suit, filed in Birmingham's federal court, seeks class-action status on behalf of HealthSouth employees who participated in the company's employee stock ownership program (ESOP), a retirement investment plan established by HealthSouth. The class consists of people who were participants or beneficiaries from Jan. 1, 1991, to the present and maintained investments in HealthSouth stock under the ESOP.

The suit said the class consists of "thousands of individuals." HealthSouth has more than 3,500 employees in Birmingham and 51,000 nationwide.

Richard Rosenthal, a Birmingham lawyer who filed the suit, said previous lawsuits represent investors in HealthSouth common shares on the open market. Rosenthal's latest suit, however, singles out those employees invested in the retirement plan, which is part of the compensation package that was offered to every worker.

The stock is practically worthless now. The New York Stock Exchange has removed HealthSouth, which now trades over the counter. At its high, the stock approached $40 a share. It closed Friday at less than 13 cents a share.

"The people I believe this affects the most are the ones who live month-to-month on each paycheck, trying to make ends meet and were relying on this ESOP plan as a form of retirement funds," Rosenthal said. Employees also could invest in a 401(k) plan, Rosenthal said.

Named as defendants are HealthSouth, founder and fired CEO Richard Scrushy, and high-level former financial executives, including Brandon Hale, Aaron Beam, Michael Martin, Tony Tanner and Bill Owens, a former chief financial officer who admitted guilt last month in the massive accounting fraud under investigation by the federal government.

The suit said that the defendants should have known, beginning in 1986, about numerous questionable and potentially unlawful practices that made HealthSouth's stock an inappropriate and imprudent ESOP investment.

A company spokesman, Andy Brimmer, said the company does not comment on pending litigation.

Efforts to reach the defendants, including Scrushy and his attorney, Donald Watkins, were unsuccessful Friday.

The suit cites several examples of financial fraud allegations that have come to light following a civil lawsuit filed against Scrushy and HealthSouth, accusing them of falsifying earnings to manipulate the stock price.

Federal officials have claimed HealthSouth inflated earnings by $2.5 billion between 1997 and mid-2002. The suit said officials filed false SEC reports and created a corporate culture of "family" loyalty to the corporation that allowed the fraudulent activities to occur for more than 15 years.

The suit said the defendants should have known about the unlawful accounting practices and the artificial HealthSouth stock inflation and should have made sure the ESOP was protected against loss as a result of investing in the stock.

The plaintiffs said the defendants are obligated under the Employee Retirement Income Security Act to make the stock option plan whole for the losses suffered as a result of their misconduct.

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