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FEDS DEMAND UBS FILES IN HEALTHSOUTH CASE

May 9, 2003 | New York Post

A Capitol Hill committee has demanded reams of documents from UBS Warburg, to determine the extent of the relationship between the New York investment bank and its scandal-scarred client, HealthSouth.

The House Committee on Energy and Commerce wants records of communications between HealthSouth officials and UBS Warburg bankers Benjamin Lorello and William McGahan and analysts Howard Capek and Geoffrey Harris. HealthSouth, a rehabilitation hospital chain operator based in Birmingham, Ala., is accused of financial fraud, and several executives have already pleaded guilty in federal court.

"There was an incestuous relationship between the top lieutenants and a small group of investment bankers and analysts," said someone close to the situation. The committee plans to "haul them all in for questioning." The House Energy and Commerce Committee requested the records in a seven-page letter to UBS Warburg Chairman and Chief Executive Officer John Costas.

"Given the substantial amount of work and revenue UBS Warburg generated from HealthSouth, Mr. Scrushy and perhaps other HealthSouth officers and directors," the letter states, "we are interested in learning what, if any, analysis and review of HealthSouth's financial condition was performed by UBS Warburg's HealthCare Banking Group, as well as by UBS Warburg's research analysts who covered health care companies, including HealthSouth."

As the primary banker to HealthSouth, McGahan has advised the company on more than $8 billion in merger deals and underwriting transactions - both at UBS and his former firm, Salomon Smith Barney. McGahan left UBS in mid-April to spend more time with his family.

HealthSouth and its former auditor Ernst & Young LLP have turned over other documents to the committee.

U.S. prosecutors allege HealthSouth and former CEO Richard Scrushy inflated profits by $2.5 billion since 1997. The company might seek bankruptcy protection after a June review of its books. It has $3.3 billion in debt.

"Clearly a lot of people walked away with million of dollars based on HealthSouth's inflated value," said committee spokesman Ken Johnson. "Were investors defrauded by analysts who were more concerned about getting rich than getting the facts right?"

People close to the investigation say that the individuals have not yet been contacted and that they are having trouble finding Harris, the analyst who covered HealthSouth before Capek.

The SEC has been investigating HealthSouth since February 2003.

"Like everyone else, UBS was shocked and dismayed to learn of the accounting fraud that took place at HealthSouth," a UBS Warburg spokesman said. "Of course, the firm will cooperate fully with the request."


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