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SEC Launches Investigation Of HealthSouth Disclosures

Sep 19, 2002 | Wall Street Journal The Securities and Exchange Commission is investigating disclosures HealthSouth Corp. made Aug. 27, focusing in part on accounting issues and trading in the company's stock, a person familiar with the matter said.

HealthSouth received a letter this week from the SEC's enforcement division in Atlanta stating that the SEC was investigating the company and requesting various documents. Richard Wessel, administrator of the SEC's Atlanta district, said he could neither confirm nor deny an investigation of HealthSouth.

Separately, the Birmingham, Ala., health-care company is expected to announce Thursday that it has hired an independent law firm, Fulbright & Jaworski LLP, to conduct an "outside review" of the company and will turn over the results to the SEC.

Lanny Davis, a Washington lawyer representing HealthSouth management in a raft of shareholder lawsuits, said the outside review will be comprehensive. It will likely include an examination of the company's Aug. 27 disclosures, which sent HealthSouth's stock plummeting; stock trades by company insiders, including Chairman Richard M. Scrushy; and the relevance of a Justice Department lawsuit filed against the company in May.

On Aug. 27, HealthSouth, the biggest operator of rehabilitation hospitals and clinics in the country, announced that a change in Medicare billing rules for group physical therapy would reduce annual earnings by $175 million. In 4 p.m. composite trading on the New York Stock Exchange on Wednesday, HealthSouth shares were down one cent at $4.16.

Mr. Davis said he contacted the SEC in Washington on Sunday by telephone and e-mail to commit to voluntarily turning over to the agency results of any outside review relating to the Aug. 27 disclosures.

Mr. Davis, a lawyer with Patton Boggs LLP who served as special legal counsel to former President Bill Clinton, said the outside review aims to address market concerns that HealthSouth executives were slow to disclose information about the Medicare change and that Mr. Scrushy may have had knowledge of the change when he sold stock in May and July. The company hopes the review, together with Mr. Davis's call to the SEC, "proves we are committed to transparency and that the facts are on our side," Mr. Davis said. "When the reviews are completed, it will be shown that we acted properly."

Mr. Scrushy has said that he didn't learn of the Medicare change until William Owens, now company chief executive, informed him on Aug. 6. He says that neither he nor any other company executives realized until meeting with Medicare officials on Aug. 15 that the change would have a material impact on the company's earnings. "I had no knowledge of anything until I was told on Aug. 6," Mr. Scrushy said in an interview Tuesday.

The company has said that some executives first learned of the Medicare change in June, but that it took roughly two months to clarify with Medicare officials whether the change applied to HealthSouth and more time to quantify that impact.

Medicare officials now say their policy hasn't changed since January 1999 and that it simply issued a "clarification" of its policy on May 17. However, HealthSouth, along with some other physical-therapy providers and industry groups, has said that there has been and continues to be -- considerable confusion around the group-therapy billing issue.

On July 31, Mr. Scrushy traded 2.5 million shares back to HealthSouth, in a private transaction at $10.06 a share, to repay a $25 million loan made to him by the company in 1999 under a program to encourage executives to buy HealthSouth stock. Mr. Scrushy said he offered to either repay the loan in cash or trade back the shares. The company opted to take back the shares because it has a share buyback plan, Mr. Scrushy said.

The shares represented nearly half of Mr. Scrushy's shares, not including options. Mr. Scrushy said he repaid the loan in response to investor pressure. Corporate loans to executives have fallen into disfavor, due to revelations of loan abuses at other publicly traded companies.

On May 14, Mr. Scrushy exercised options he had held since 1992 and simultaneously sold the related 5.3 million shares, making an indicated profit of $52 million. Mr. Scrushy said most of the options were about to expire and he sold the shares to diversify his holdings for estate-planning purposes.

On May 23, the Justice Department joined a civil suit filed against the company in Texas, alleging in part that the company defrauded Medicare by submitting bills for more lucrative individual physical therapy when patients had in fact been treated in groups.

Mr. Scrushy said that to his knowledge, his company has never submitted bills to Medicare for "individual" therapy when patients were receiving "group" therapy, which it understood to be two or more people performing the same exercises under supervision of a therapist.

The company has, however, billed for individual therapy in cases where two more patients are in the same room with a single therapist, but are performing different exercises or therapies. The company says such a practice was appropriate before the change Medicare announced on May 17.

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