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Goverment: HealthSouth Fraud Much Larger Than First Thought

Apr 4, 2003 | AP

Embattled rehabilitation hospital operator HealthSouth Corp. faked some $2.5 billion in earnings, or almost twice as much as previously alleged, according to new government claims.

Documents filed by prosecutors Thursday in the case of one of the latest of eight HealthSouth executives to plead guilty to criminal charges show the health care giant overstated earnings by $440 million in 1997 and $635 million in 1998 nearly $1.1 billion over two years.

That's in addition to the $1.4 billion in inflated earnings since 1999 the Securities and Exchange Commission alleged last month in accusing HealthSouth and Richard Scrushy, its ousted chairman and chief executive, in a massive accounting fraud.

The company is cooperating with investigators and has said its financial reports are no longer reliable.

Scrushy's newest lawyer said his client the target of a criminal investigation has done nothing wrong.

''A handful of bureaucrats in Atlanta and Washington have used indiscriminate government power to cause massive collateral damage to HealthSouth and to shame Richard Scrushy,'' attorney Donald V. Watkins told The Birmingham News in a story published Friday.

Watkins, a lawyer, bank executive and energy investor, is best known for his unrealized attempts to become the first black owner of major league baseball clubs including the Minnesota Twins.

The government contends Scrushy had HealthSouth overstate its earnings to make it appear the company was meeting Wall Street forecasts and to protect the value of his stock.

In a new allegation added to the SEC suit late Thursday, the government accused Scrushy of insider trading. It claimed he sold at least 13.8 million shares of HealthSouth stock worth more than $170 million based upon his knowledge of the company's true results. It did not provide time frame in the amended complaint for when the the sales occurred.

While huge, the HealthSouth scandal is still smaller than the one engulfing WorldCom Inc., a Mississippi-based telecommunications company that admitted to a $9 billion accounting fraud.

The government's new figures about the HealthSouth case were filed in the case Kenneth Livesay, 42, one of five executives to plead guilty Thursday.

Livesay, chief information officer, pleaded guilty to charges of conspiracy to commit wire fraud and falsifying corporate records. Livesay was involved in the scheme since 1996, the charges claimed.

The others who agreed to plea deals on fraud charges are: Angela C. Ayers, 33; Cathy C. Edwards, 39; and Rebecca Kay Morgan, 35, all corporate vice presidents; and assistant vice president Virginia B. Valentine, 33.

Upper managers approached the four women as early as 1994, when they held lower-level jobs, and asked them to enter false numbers in accounts on a temporary basis, U.S. Attorney Alice Martin said.

''In the summer of '02 many of these employees said, `We no longer want to participate in this. This temporary situation y'all were talking about for several years isn't temporary,''' she said.

None of the workers reported the fraud to authorities, Martin said, and some have expressed fear of physical or psychological retribution if they came forward.

The company, which on Thursday laid off 165 workers, or 20 percent of its headquarters staff, has said it would fire any employee involved in fraud.

HealthSouth was unable to make $367 million in bond and interest payments this week, and it has stopped construction on two hospitals in Alabama. An aircraft leasing company sued HealthSouth for $48 million this week for overdue payments on a corporate jet.

HealthSouth describes itself the largest U.S. provider of diagnostic imaging, outpatient surgery and rehabilitation services. The company has nearly 1,700 locations in all 50 states and abroad.

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