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HealthSouth Insider Buying Preceded Woes at Company

Executives' Stock Purchases Aren't Always Bullish Signs

Mar 25, 2003 | Wall Street Journal

The crisis at HealthSouth Corp. apparently wasn't anticipated by company insiders, who continued to buy shares even as the company's troubles deepened.

In fact, insider buying supposedly a strong bullish indicator has preceded many of the corporate meltdowns of recent years, including those at Enron Corp., WorldCom Inc., Global Crossing Ltd. and Adelphia Communications Corp.

People who watch insider transactions attribute such purchases to posturing by executives or simply to the buyers' lack of awareness. Officials at HealthSouth, a Birmingham, Ala., provider of outpatient-surgery and diagnostic and rehabilitative services, weren't available to comment on the insider transactions.

HealthSouth Chairman and Chief Executive Richard Scrushy, who was put on administrative leave last week after accusations of accounting fraud, was himself one of the buyers. According to a Securities and Exchange Commission filing, in September Mr. Scrushy paid $4.1 million to exercise options to buy company stock.

The company portrayed this as a vote of confidence by Mr. Scrushy, but even at the time, some people were skeptical. David Coleman, editor of Vickers Weekly Insider Report, noted in an interview in September that in the months before Mr. Scrushy bought shares, he pocketed millions of dollars from selling shares.

Before the purchase in September, Mr. Scrushy made nearly $80 million in 2002, before expenses and taxes, by selling shares, according to an analysis of filings made with the SEC.

"I would say there's a strong possibility of some posturing going on," Mr. Coleman said at the time.

Jonathan Moreland, director of research for, said some insider buys are "window-dressing," and he noted that former Enron Chief Financial Officer Andrew Fastow, a central figure in that company's accounting scandal, bought 10,000 company shares for nearly $37 each in August 2001. Enron filed for Chapter 11 protection in December 2001.

Although he questioned Mr. Scrushy's purchase of HealthSouth stock in September, Mr. Coleman said more recent transactions by company insiders don't appear to be the result of posturing.

This month, three company directors bought 86,283 company shares for $314,594 at an average of $3.65 a share, according to regulatory filings. Unlike Mr. Scrushy, none of the directors is implicated in the accounting-fraud accusations made by the SEC.

Robert P. May, a company director who was named acting chief executive of HealthSouth on Thursday, reported that he bought 5,500 company shares for $3.70 each on March 12.

Trading in HealthSouth stock was suspended on the New York Stock Exchange, with the last trade on March 18 at $3.91. The stock now trades on the Pink Sheets and was quoted at nine cents Tuesday.

Insider stock transactions were an integral part of the scandals at Enron, WorldCom and Adelphia, where the companies lent large sums to executives. The Sarbanes-Oxley Act was passed by Congress last year in part to prohibit such loans.

However, as with HealthSouth, many of the insiders at such companies made purchases that weren't controversial. At Global Crossing, insiders paid prices from 51 cents a share to $3.77 a share for 394,000 company shares in the months preceding that company's January 2002 bankruptcy filing.

In the six months before the WorldCom accounting scandal was uncovered, two directors paid nearly $1 million to buy company stock, according to data from Thomson Financial.

"I believed in the people and the mission and I had no idea whatsoever that there was anything fraudulent," Gordon S. Macklin, one of the former WorldCom directors, said Thursday. "It was a bad bet."

In general, Mr. Moreland said, purchases by company directors are less useful as an indicator than purchases by executives.

"All of the recent purchases [at HealthSouth] were by directors," said Mr. Moreland. "Nobody with real hands-on experience. I think you'd have to wonder how much of the reality was making it into the directors' meetings."

In any case, Mr. Moreland said, over-reliance on insider-transaction data is a mistake. Such information is mainly useful as an initial screen to identify interesting companies, he said.

"Insiders aren't always right," said Mr. Moreland. "I have seen insiders, they're just not paying attention. They're looking the other way."

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