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Ex-HealthSouth Executive Under Federal Scrutiny

Apr 11, 2003 | The Tennessean

Federal investigators are interested in discovering if a Nashville health-care executive knows anything about alleged accounting fraud at HealthSouth Corp., where he once worked as a financial officer.

The executive, Leif Murphy, has not been named in court papers or tied to any allegations of wrongdoing at HealthSouth. There is also no public record that he has been subpoenaed or contacted about the accusations of fraud at HealthSouth.

But an official familiar with the investigation confirms that federal authorities are interested in knowing more about his tenure at HealthSouth.

Murphy, 35, is executive vice president and chief financial officer of National Nephrology Associates, a Nashville-based dialysis company. He joined NNA in August 1999 from HealthSouth, where he worked as a group vice president of finance and treasurer.

It is not clear exactly what role Murphy played within HealthSouth's finance department, or even how long he worked at the company. His current employer stands behind Murphy, calling him a gifted and capable finance chief.

''There is no action I would take today unless for some reason he was actually found guilty of doing something wrong,'' said Dr. Jerome Tannenbaum, NNA's founder and chief executive officer. ''In my experience he has been a fabulous chief financial officer, and I have no reason to be believe he has any implication in this.''

Based in Birmingham, Ala., HealthSouth is one of the nation's largest health-care companies, providing outpatient surgery, rehabilitation and other services at 1,800 locations across the United States and overseas. The company has approximately two dozen facilities in Tennessee and manages Vanderbilt Stallworth Rehabilitation Hospital in partnership with Vanderbilt University Medical Center.

The Securities and Exchange Commission sued HealthSouth last month, alleging that the company employed fraudulent accounting practices to overstate profits by $2.5 billion in order to meet Wall Street expectations. The investigation is being handled by the SEC, the Birmingham office of the FBI, and Alice Martin, the U.S. attorney for the Northern District of Alabama.

Martin could not be reached, and spokesmen for the SEC and FBI declined to say whether they had contacted Murphy. The spokesmen, however, said investigators' work was ''ongoing and active'' and implied that current and former HealthSouth employees were still being looked at.

''We're still getting our arms around what took place at the company and looking at who may have been involved,'' said Richard Murphy, an assistant director at the SEC's Atlanta office.

Eight former HealthSouth finance executives have already pleaded guilty to criminal charges, and a ninth has agreed to do so.

In their guilty pleas, the executives implicate HealthSouth founder Richard Scrushy, who they say directed employees a group that became known as ''the family''to alter the company's books to fill ''gaps'' between HealthSouth's actual earnings results and the numbers expected by Wall Street analysts. The $2.5 billion figure is the amount the company's earnings were overstated from 1997 to the second quarter of 2002.

Scrushy, who has been fired as HealthSouth's CEO, has also been charged with insider trading by the SEC. He has denied wrongdoing. Nashville health-care executive Joel Gordon, who sold his company Surgical Care Affiliates to HealthSouth in 1996, is HealthSouth's acting chairman.

Details about Leif Murphy's time at HealthSouth are hard to come by. Reached yesterday, he declined to comment about the federal investigation, or answer questions about his role at HealthSouth or how long he worked there.

''I don't feel it's appropriate to comment,'' Murphy said. ''At this point I'm not comfortable, given the circumstances of things.''

HealthSouth officials declined to reveal information about his employment history, citing company policy.

National Nephrology Associates' corporate Web site had previously indicated that Murphy served as group vice president of finance and treasurer at HealthSouth, reporting directly to the company's chief financial officer. It highlighted his management of $3.5 billion in acquisitions at the company, including ''$1.25 billion in non-strategic asset dispositions.'' The site no longer mentions Murphy's employment at HealthSouth.

''I gather that was something Leif preferred to deal with, and that was fine by me,'' Tannenbaum, NNA's CEO, said of the Web site changes.

Generally, a treasurer for a large public company is involved in a variety of finance-related activities, including cash management, capital-raising, merger and acquisition work and even investor relations. While his or her exact duties can vary, it is not unusual for a treasurer to lack intimate knowledge or understanding of his company's accounting procedures.

''Typically, the skill sets (for a treasurer) come out of banking, or investment banking, not accounting,'' said Steve Tisdell, a financial consultant at Nashville Management Group and a former chief financial officer at Nashville-based Central Parking Co.

Recent court papers filed as part of HealthSouth executives' guilty pleas suggest that the alleged accounting fraud had spilled into the company's treasury unit.

By 1998, the difference between HealthSouth's actual earnings and those reported to the SEC ''had become very large and was growing larger,'' Bloomberg News has reported, citing court papers. HealthSouth's treasury employees described the situation as ''one of burning through cash,'' the papers said. The company was forced to borrow money from banks to pay income taxes, the papers said.

Murphy is not mentioned in any of the documents.

In a telephone interview, Tannenbaum praised Murphy, whom he hired by way of an executive search firm in 1999.

''He was brought to us among others and was unequivocally the strongest of the group,'' Tannenbaum said. ''Frankly, he's been the best chief financial officer I've ever worked with, and I've worked with quite a few CFOs in the past 15 years.''

Tannenbaum added that he hoped Murphy's name would not be tarnished by HealthSouth's troubles.

''Unfortunately, it's awkward for anyone who was working for HealthSouth at that time. Often there's guilt by association and it can be completely unfounded,'' he said. ''I sure hope Leif doesn't get caught up in that vortex, because in my experience he is a man of very high integrity and an honest, hardworking CFO.''

For that reason, Tannenbaum said he has not asked Murphy any specific questions about the HealthSouth investigation.

''Frankly, I've been very careful not to ask any questions because to tell you the truth, if he did something that was wrong, he might not want to discuss it with me anyway,'' Tannenbaum explained. ''If he didn't do something wrong, then there is nothing to talk about.''

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