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HealthSouth Woes Could Burn Holes In Shareholders' Pockets

Mar 19, 2003 |

The Securities and Exchange Commission halted trading of HealthSouth Corp. stock for two business days, Wednesday and Thursday, after filing a complaint that alleges the company's chief executive officer and others committed accounting fraud.

While CEO Richard M. Scrushy and Chief Financial Officer Weston Smith face federal charges, some experts say HealthSouth investors may be the biggest losers in the end.

NBC13 talked to financial experts Wednesday afternoon to find out what the news means to those who own HealthSouth shares.

HealthSouth stock closed Tuesday at $3.91 a share down from more than $15 a share in July 2002.

SEC investigator Ronald Crawford says HealthSouth faces major losses.

"Well, I think for any public company suspending its trading in the marketplace is a substantial detriment to the company's viability, so it is a substantial penalty," Crawford said.

One local investment manager predicts mutual fund managers and stockholders will sell HealthSouth shares as soon as the stock opens for trading again Friday.

CNBC reporter David Faber, who broke the story Wednesday morning, says Wall Street will react poorly to HealthSouth's troubles.

"None of this is good news. The stock is going to open sharply lower," Faber said.

Crawford agrees.

"More than likely, obviously when trading resumes, the price of the stock is going to be down and investors will be hurt," Crawford said.

In the last year, investors have lost millions of dollars because of companies like Enron and WorldCom that have also faced SEC charges of accounting fraud. Faber says the situation with HealthSouth is no exception.

"The board of directors at HealthSouth appears to have done little if anything to reign in CEO Richard Scrushy stop him from doing certain things and there was a pattern that went on here many, many years that appears to have been defrauding investors unbeknownst to shareholders and the auditors and the board of directors, so in that way it's similar to WorldCom and Enron," Faber said.

HealthSouth currently faces a number of lawsuits from investors that stem from last summer's stock sale by Scrushy. The sales were made before the company said in August that profits would fall because of reduced payments from Medicare. Scrushy is also under investigation for selling his shares.

Financial managers say more lawsuits by investors could be on the way.

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