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Now, Employees Sue HealthSouth

Workers claim Scrushy sold company stock before releasing bad news about earnings

Apr 9, 2003 | www.cfo.com It's looking like Enron all over again. Only this time, executives at HealthSouth, the beleaguered provider of outpatient surgery and diagnostic health-care services, appear more than willing to cop a plea.

Yesterday Reuters reported that the company's former CFO, Michael Martin, is expected to plead guilty to charges of conspiracy to commit wire and securities fraud, as well as filing false numbers. Martin, the third ex–chief financial officer and ninth former HealthSouth executive to face criminal charges in the mushrooming accounting scandal, served as HealthSouth CFO from late 1997 until February 2000, when he left the company.

The charges reportedly accuse Martin of following orders from CEO Richard Scrushy to do everything possible to meet Wall Street's earnings expectations. Scrushy was fired last week and is currently under criminal investigation. He has denied wrongdoing.

Eight former HealthSouth executives, including former CFOs Weston Smith and William Owens, previously pleaded guilty. The two are reportedly cooperating with investigators, who say company management has overstated earnings by $2.5 billion since 1997.

As if that wasn't bad enough news for the Birmingham, Alabama-based company, on Monday a group of HealthSouth employees filed a lawsuit against the company's stock-option plan (ESOP) and its trustees. The charges? Insider trading and breaching fiduciary duties.

Employees claim that while Scrushy was withholding information about the company financials, he sold or disposed of more than 7.7 million shares of HealthSouth common stock for more than $99 million.

In August 2002, HealthSouth management issued a press release disclosing that annual earnings would fall short by approximately $175 million. Following the announcement, the price of HealthSouth shares plunged nearly 60 percent, leaving investors dumbfounded.

"We intend to prove that HealthSouth's ESOP trustees, led by Scrushy, had an affirmative obligation to protect the interests of the ESOP participants," said Steve Berman, the attorney bringing the suit on behalf of company employees. He added: "We allege that when Scrushy and his cohorts misstated earnings, they had a duty to disclose to participants the risky nature of the ESOP and to begin diversifying the ESOP's assets."

Other defendants in the lawsuit include HealthSouth chief operating officer William Owens and senior vice president Brandon Hale. The suit was filed on behalf of employees who participated in the ESOP from January 1, 1999, to the present.

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