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HealthSouth's First CFO Pleads Guilty

Apr 24, 2003 | UPI Aaron Beam Jr., HealthSouth Corp.'s first chief financial officer and one of its founders, has agreed to plead guilty to two counts of bank fraud, federal prosecutors said Thursday.

The Justice Department now has secured guilty-plea agreements from all five former chief financial officers at the nation's largest for-profit hospital chain.

"Beam's cooperation allows us greater understanding of the accounting fraud scheme at HealthSouth and those persons who participated in the scheme," Alice Martin, U.S. Attorney for the Northern District of Alabama, said in a statement.

As part of a widening investigation, which now includes an inquiry by the House Energy and Commerce Committee, the Securities and Exchange Commission alleged HealthSouth deliberately overstated its earnings by at least $1.4 billion since 1999.

The Justice Department alleges that from about April 1996 to October 1997, Beam, 59, and others including former Chairman and Chief Executive Officer Richard Scrushy collaborated to obtain loans from AmSouth Bancorp by supplying fraudulent financial data to the bank.

The lenders extended a line of credit totaling $1.25 billion to HealthSouth, including a $55 million loan from AmSouth, in exchange for quarterly and annual financial statements which were to be certified as true and accurate, according to the Justice Department.

Beam, an original founder of HealthSouth, served as the company's chief financial officer from the HealthSouth's creation in 1984 until October 1997. The bank fraud charge that Beam faces carries a maximum sentence of 30 years in prison and a fine of up to $1 million.

Beam is the 11th individual to be charged in the government's ongoing investigation into the Birmingham, Ala., -based company's finances. On Monday, former HealthSouth treasurer Malcolm McVay pleaded guilty to conspiracy to commit wire and securities fraud and to filing false financial information with the SEC.

The same charges were filed against former HealthSouth CFO Michael Martin on April 8. On April 3, five HealthSouth officers were charged and pleaded guilty in connection with accounting fraud, including Chief Information Officer Kenneth Livesay. HealthSouth Vice President of Finance Emery Harris had previously pleaded guilty to accounting fraud charges, as had Chief Financial Officer William Owens and former CEO Weston Smith.

The House Energy and Commerce on Wednesday launched an investigation into HealthSouth and the role of its auditor Ernst & Young.

The panel, which has investigated fraud cases at Enron Corp. and ImClone Systems Inc., demanded HealthSouth records and communications about its finances. The committee is also interested in the business relationships of the company's former chief executive and Medicare billing and reimbursement practices.

"The financial collapse of HealthSouth, and the allegations of fraud within the company, raises serious concerns about the oversight and management of the company by the board of directors over the span of several years and about the auditing practices of HealthSouth's internal and outside auditors," the committee said in a letter to HealthSouth.

The House committee also sent a similar request to Ernst & Young, which has served as the auditor for HealthSouth during the period in question.

The committee demanded the auditor and HealthSouth turn over the records by May 6.

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