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HealthSouth: SEC Is Investigating

Sep 19, 2002 | AP

HealthSouth Corp. said Thursday it is being investigated by the Securities and Exchange Commission in the wake of recent disclosures that its earnings would be sharply lower than expected and that its founder and chairman, Richard Scrushy, had sold half his stake in the firm a few weeks before the profit warning.

The earnings announcement on Aug. 27 sent its share price skidding 44 percent lower that day.

The Birmingham-based company, which operates rehabilitation hospitals and clinics around the country, did not specify which areas the SEC would be looking at, but told investors during a conference call Thursday it would be cooperating fully.

SEC spokesman John Heine refused to confirm if HealthSouth is being investigated.

"We have been subjected to misleading and inaccurate press reports," Scrushy said during the conference call. He said the company has strong cash flow and high revenues, and he dismissed pending class-action lawsuits from investors as frivolous.

"We're in a very difficult environment right now," he said. "This is the first time I've experienced an environment where reactions are so severe to even the smallest bit of news."

The company also announced it had named a new independent member to its board and had appointed a special litigation committee to review matters related to claims against the company.

In trading on the New York Stock Exchange, HealthSouth shares fell 26.7 percent, or $1.11 a share, to close Thursday at $3.05.

On Aug. 27, HealthSouth announced it was reducing its earnings estimates by $175 million based on a clarification of a Medicare billing policy, which was issued May 17. The announcement also said Scrushy would be replaced as chief executive by president Bill Owens, but would continue as chairman of HealthSouth and a new surgery center company being spun off by the firm.

Earlier this month, it was disclosed in an SEC filing that Scrushy sold about $25 million worth of stock -half his stake in the company on July 31.

Lawsuits have been filed against Scrushy and HealthSouth executives that question the timing of the insider stock sale and whether information was kept from shareholders who lost some $2.7 billion in value in the initial price plunge.

One issue in the shareholder lawsuits is whether Scrushy knew how much impact Medicare's policy would have on HealthSouth earnings when he sold his shares.

Scrushy said Thursday the company did not have any indication as to the impact the Medicare policy change would have on earnings until Aug. 15, and that he sold back the stock shares July 31 to pay off a loan from the company in an overall effort to reduce HealthSouth's debt load.

He also said a Sept. 13 conference call among Medicare agency officials and hundreds of physical therapy providers, trade group representatives and doctors revealed confusion among Medicare officials themselves over the policy clarification.

"We believe this will have a detrimental impact on all of the therapy industry," Scrushy said of the Medicare change.

In its news release, HealthSouth officials said they contacted the SEC earlier this week on their own initiative and volunteered to provide "any information that might be helpful to it in evaluating recent events."

The company said it was later notified the SEC was conducting an investigation.

"Our board and management team are fully committed to addressing the issues that have been raised in recent days," Scrushy said in the news release.

"We have a strong company in sound financial condition, and we are confident that the results of the steps we have outlined today will demonstrate our commitment to acting in the best interests of our stockholders," he said.

The company said Jon F. Hanson, chairman of The Hampshire Companies, a real estate investment firm in Hackensack, N.J., has agreed to join HealthSouth's board. He has served on the boards of Prudential Financial Inc. and Bell Atlantic/New Jersey Inc.

The company also announced that HealthSouth director Larry Striplin Jr. and Hanson will serve on the special litigation committee.

HealthSouth has asked Fulbright & Jaworski LLP to conduct a review of issues related to litigation and other matters. Their findings will be presented to the board and shared with regulatory authorities.

HealthSouth is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services with about 1,900 locations in all 50 states, Britain, Australia, Puerto Rico and Canada. The company had revenues of some $4.3 billion last year.

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