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SEC Requests Broad Range Of HealthSouth Documents In Accounting Probe

Sep 19, 2002 | The Wall Street Journal

The Securities and Exchange Commission is seeking a broad range of documents from HealthSouth Corp. (NYSE: HRC - News) as it investigates accounting issues and stock trading related to announcements that sent the company's shares off a cliff in August, Friday's Wall Street Journal reported.

The SEC notice, which the Birmingham, Ala., health-care concern received Wednesday, seeks information from Dec. 1, 2001, through the present, according to a person familiar with the document. The letter states the examination is a fact-finding inquiry, and doesn't mean the SEC has determined any laws were broken.

Still, news of the investigation sent HealthSouth shares to a new 52-week low. As of 4 p.m. in New York Stock Exchange composite trading, HealthSouth stock stood at $3.05, down $1.11, or 27%.

Meanwhile, HealthSouth executives said in a conference call with analysts that the company is in solid financial health. They also pledged full cooperation with the SEC inquiry. HealthSouth is "fully and unambiguously committed to acting in the best interest of our stockholders," Chairman Richard M. Scrushy said.

The SEC letter requests 28 categories of information, covering in effect all company paperwork concerning a profit warning issued Aug. 27. It seeks, among other things, opinions from accountants; policies on the sale of HealthSouth securities by employees, officers and directors; minutes of board and committee meetings; e-mails and memos between HealthSouth and its lawyers; Mr. Scrushy's employment agreement and reports filed with federal regulators, including the agency that administers Medicare.

In the Aug. 27 announcement, the company said a change in Medicare billing rules for group physical therapy, issued May 17 and effective July 1, would reduce annual earnings by $175 million. At issue in the new rule -- which Medicare says is a "clarification" of a policy in place since 1999 -- is how physical therapists bill for therapy provided to more than one patient at a time.

HealthSouth executives have said they were unaware until Aug. 15 that the change would materially affect HealthSouth earnings, and needed time to determine the amount. But investors have questioned the timing of the disclosure as well as the timing of stock trades by insiders, including sales by Mr. Scrushy in May and July, before the precipitous drop.

Mr. Scrushy repeated yesterday that his stock sales were proper. As statement of confidence in the company, on Monday he exercised options to buy 1,084,000 shares at $4.67 apiece, a spokesman said. Mr. Scrushy now owns 3,759,661 shares, or about 1% of HealthSouth. He also holds options to buy roughly 10.4 million additional shares, which would give him 3.5% of the company.

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