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HealthSouth Executives to Plead Guilty to Conspiracy

Apr 3, 2003 | Bloomberg

Five HealthSouth Corp. officers agreed to plead guilty to conspiring to inflate company earnings and will help prosecutors investigating fired chief executive Richard Scrushy.

Admissions by the five will bolster testimony of three other HealthSouth executives who have pleaded guilty to fraud and are aiding prosecutors in their probe of Scrushy. The U.S. Securities and Exchange Commission has accused Scrushy and HealthSouth, the largest U.S. operator of rehabilitation hospitals, of inflating revenue by at least $1.4 billion and assets by $800 million.

Charged today were: Rebecca Kay Morgan, 35, group vice president, accounting; Cathy Edwards, 39, vice president, asset management; Kenneth Livesay, 42, chief information officer; Angela Ayers, 33, vice president, finance and accounting; and Virginia Valentine, 33, assistant vice president, finance and accounting.

``These individuals trusted upper management, but they still participated in this fraud,'' U.S. Attorney Alice Martin said at a news conference in Birmingham. ``What was driving the fraud from the top was clearly a desire to meet Wall Street's expectations and have the earnings per share that the analysts were projecting.''

All five executives will plead guilty today to conspiracy to commit wire fraud, securities fraud and filing false records, Martin said. The five will cooperate with prosecutors investigating Scrushy and help HealthSouth with a forensic audit of its books, she said.

None the executives was immediately available for comment.

Assisting HealthSouth

``The way we are handling this investigation is going to be an assistance to HealthSouth in trying to avoid bankruptcy,'' Martin said. ``We have made an extensive effort to try to assist a corporation that is cooperating in this investigation.''

The four women joined the conspiracy as early as 1994; Livesay joined in 1996, the charges said. Livesay is charged with a separate count of filing false books and records. Edwards and Morgan were also charged with wire fraud. The five executives will be required to forfeit any gains from their fraud.

Ayers and Valentine were charged with making false entries to contractual-allowance accounts. Morgan falsified cash accounts, and Edwards falsified asset accounts, according to court papers. Livesay conspired with senior officers to direct the accounting fraud between 1996 and 1999, the papers said.

Insider Trading

The investigation of Scrushy and other HealthSouth executives began as an insider-trading probe last year and transformed into an accounting-fraud case last month, Martin said. The insider- trading case is ``on the back burner'' while prosecutors pursue accounting-fraud allegations, she said.

``We expect that additional criminal charges will be filed against finance employees who are currently cooperating'' with prosecutors and have not been charged, Martin said in an interview. ``It's moving at warp speed.''

``One reason that the guilty pleas are coming in a fast and furious manner is because the underlying conduct is so egregious and relatively easy for the government to establish,'' said Christopher Bebel, a former SEC attorney. ``Scrushy's prospects look bleak.''

Two former chief executive officers, Weston Smith and William Owens, pleaded guilty last month and implicated Scrushy in an accounting fraud dating back to 1986. Assistant controller Emery Harris also pleaded guilty. All three men are cooperating with Martin's office.

The fraud detailed in the new charges extended back earlier than previously alleged by the other three executives, Martin said. The charges against Livesay, the former assistant controller, state that HealthSouth overstated pre-tax income by $635 million in 1998 and by $440 million in 1997, according to court papers.

Actual Earnings

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

FBI agents are trying to identify Scrushy's assets to determine if any were derived from a crime. Investigators are looking at the relationship between HealthSouth and two medical firms in which Scrushy invested, MedCenterDirect Inc. and Source Medical Inc., they said.

HealthSouth has hired lawyers and turnaround specialists to help the Birmingham-based company avert bankruptcy. The company defaulted on $367 million in bond and interest payments this week, postponed its annual shareholders meeting and said it would not be able to file its annual report to the SEC on time. The company said today in a press release that it would fire 165 workers from its 830-employee headquarters staff to cut costs to help avoid bankruptcy.

Return Bonuses

HealthSouth said Scrushy should return any salary or bonuses he earned if the federal investigations prove he inflated earnings on which his compensation was based. The SEC may also demand that Scrushy forfeit any profits he made as a result of inflating earnings or assets. Scrushy sold $247 million in company stock between 1987 and 2002, SEC records show.

HealthSouth fired Scrushy, 50, as CEO and chairman. He has not been charged with a crime. A call to his home for comment was not returned.

Scrushy founded HealthSouth in 1984 and used acquisitions to build a company with 51,000 employees and 1,700 facilities in 50 U.S. states.

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