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More Guilty Pleas in HealthSouth Scandal

Apr 7, 2003 | Five officers of HealthSouth—including several accounting executives and the company's CIO—pleaded guilty late last week to federal fraud charges. The charges are in connection with an apparent overstatement of profits that allegedly boosted HealthSouth's earnings by as much as $2.5 billion, according to press reports.

The executives of the outpatient surgery and medical rehab provider admitted they conspired to commit wire fraud, securities fraud, and filing false records. They were Kenneth Livesay, chief information officer; Rebecca Kay Morgan, group vice president, accounting; Cathy Edwards, vice president, asset management; Angela Ayers, vice president, finance and accounting; and Virginia Valentine, assistant vice president, finance and accounting.

The four finance executives got involved in the conspiracy in 1994, with the CIO joining the group in 1996, the New York Times reported. Ayers and Valentine admitted to making false entries into contractual-allowance accounts. Such accounts contain patient charges that won't be collected because of a contractual agreement with a third-party payer to accept less than the standard charge. Typically the allowances reduce patient accounts receivable.

Other accounting-related admissions: Morgan acknowledged falsifying cash accounts and Edwards said she falsified asset accounts.

Three other former HealthSouth finance executives have already pleaded guilty to fraud charges: William Owens and Weston Smith, who had both been CFOs, and Emery Harris, who was an assistant controller at the company.

The plea offered by Livesay, the CIO, put HealthSouth's profit overstatement at $2.5 billion since 1997, according to the Wall Street Journal.

Last month the Securities and Exchange Commission filed a lawsuit alleging that, since 1999, the company and its former CEO, Richard Scrushy, systematically overstated HealthSouth's earnings by at least $1.4 billion.

To boost profits, Livesay claimed, HealthSouth executives overbooked certain reserve accounts that were later "bled out" into revenue, according to the Journal story.

In his plea agreement, the CIO also said the company overstated pretax income by $440 million in 1997 and $635 million in 1998.

Besides its previous civil charges against Scrushy, the SEC reportedly accused the onetime HealthSouth CEO of insider trading. The commission indicated it would seek up to $743 million in penalties, forfeiture of illegal profits, and triple damages—if it is able to prove the new charges.

Scrushy was fired as HealthSouth's chairman and CEO last week.

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