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HealthSouth Finance Officials May Sign Plea Agreements

Mar 26, 2003 | Wall Street Journal Federal prosecutors are expected to reach plea agreements with some senior HealthSouth Corp. finance officials in the coming days as investigators build their criminal case against the company's chairman and chief executive, Richard M. Scrushy.

The first such agreement is expected Wednesday with a key HealthSouth executive, a development that would further advance the fast-moving investigation.

Alice Martin, the U.S. attorney in Birmingham, Ala., said her office would file criminal charges against the HealthSouth executive Wednesday in federal court. This "filing of an information" is expected to be similar to the plea agreement reached last week with HealthSouth's former chief financial officer, Weston L. Smith. He pleaded guilty to conspiracy to commit wire fraud and securities fraud in connection with what the government says was a longstanding scheme to artificially inflate the company's financial results. Mr. Smith is assisting prosecutors.

Quick Progress

The Securities and Exchange Commission, in a civil complaint last week, accused HealthSouth and Mr. Scrushy with overstating earnings by $1.4 billion since 1999. The SEC contends, however, that the earnings manipulation goes back to shortly after HealthSouth went public in 1986.

Ms. Martin said her investigation has progressed quickly, in part, because so many company employees have agreed to share information about the alleged fraud at HealthSouth, the Birmingham provider of outpatient surgery and rehabilitation services.

"When you have people who orchestrated the fraud laying it out for you, that certainly helps," said Ms. Martin, 46 years old, who was appointed U.S. attorney here in September 2001. She said investigators are examining corporate documents seized at HealthSouth and talking to individuals who were issued grand-jury subpoenas in the matter.

Plea agreements, according to lawyers representing certain HealthSouth executives, are expected to be reached with as many as half a dozen people who worked in the tight-knit finance and accounting offices. They said they could include agreements with William T. Owens, who is the company's most recent chief financial officer, and top finance officials. Some defense attorneys had lengthy negotiations Tuesday with the U.S. attorney's office about possible pleas.

Search for a New CEO

Mr. Scrushy, who has been placed on administrative leave by HealthSouth, said through his lawyers last week that he had been cooperating with investigators and that he was shocked at the government's actions. Tuesday, Mr. Scrushy's attorney declined comment except to say an interim agreement had been reached with the government so Mr. Scrushy, whose assets had been frozen, could pay certain expenses until April 9. Mr. Scrushy wasn't available for comment.

HealthSouth directors have decided to immediately launch a search for a new chief executive rather than let interim CEO Robert May run the company for several months, according to people close to the situation. The HealthSouth board is also expected to meet Thursday and approve at least one, and possibly two, new board candidates. HealthSouth declined to comment on the continuing criminal investigation.

Cooperation from HealthSouth executives in addition to Mr. Smith would provide a major boost to the government in obtaining critical company documents, culling information from more employees and possibly pursuing criminal indictments against Mr. Scrushy. "There is a wonderful expression in the law-enforcement community: 'There is no clue as good as a good squeal,' " said Harold Ruvoldt Jr., a New York criminal-defense attorney.

According to people familiar with the situation, the executives who could sign plea agreements include Mr. Owens, HealthSouth's chief financial officer who was placed on administrative leave by the company last week; Kenneth Livesay, chief information officer and a former assistant controller; Emery Harris, an assistant controller, and Kay Morgan, an assistant controller.

Frederick Helmsing, a lawyer for Mr. Owens, said a plea agreement for his client was a "realistic possibility." J. Stephen Salter, the lawyer for Mr. Harris, said his client and several other high-level executives of HealthSouth are pursuing possible plea agreements that could be finalized early next week. Those agreements are expected to be similar to Mr. Smith's, but they would vary depending on the executive's level of responsibility within the company, Mr. Salter said.

Richard Jaffe, a lawyer for Ms. Morgan, met with representatives from the U.S. attorney's office Tuesday but said no plea agreement has been proposed for his client yet. "I won't rule out that possibility," he said. "Things are happening at an extremely rapid rate."

Thomas Spina, a lawyer for Mr. Livesay, declined to comment.

Many of the financial executives talking with investigators worked their way up the HealthSouth ladder over many years, according to people familiar with the company and HealthSouth records. Mr. Owens, a certified public accountant who joined the company in 1986, was promoted to finance chief in 2000. Mr. Harris started at the company in 1992 as an accountant in his early 20s, his lawyer said. Ms. Morgan worked her way up from a clerical position at HealthSouth in the late 1980s to assistant controller, according to her lawyer.

Meanwhile, the company's lenders are planning to block HealthSouth from paying about $345 million to convertible noteholders. The payment is due Tuesday, and the move could set up a fight with the investors who bought those notes. The lenders continue to discuss whether to help HealthSouth avert a Chapter 11 bankruptcy-court filing.

Ernie Knewitz, a HealthSouth spokesman, said talks with the company's lenders are continuing. He also said the company hasn't decided whether it will appeal the New York Stock Exchange's decision Tuesday to seek to delist its shares.

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