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SEC Targets Ex-HealthSouth CEO in Fraud

Apr 5, 2003 | AP

Accused of running a huge scam to overstate HealthSouth Corp.'s earnings by some $2.5 billion since 1997, ousted CEO Richard Scrushy could be forced to pay $785 million or more if he loses a government lawsuit accusing him and the company of fraud.

Bill Hicks, an attorney with the Securities and Exchange Commission, said Friday the agency could seek that amount from Scrushy for damages and repayment of ill-gotten gains.

"It could go up if we find more insider trading or more profiting from the fraud," Hicks said in a telephone interview from Atlanta.

Scrushy denies claims in a government lawsuit filed last month claiming that he inflated earnings to protect his own share values and to make it appear HealthSouth was meeting Wall Street forecasts.

HealthSouth, which Scrushy founded in 1984, said it is cooperating with investigators.

Eight former executives have pleaded guilty, and Scrushy is the target of a federal criminal investigation.

Scrushy, who made $68 million in salary last year, exercised stock options worth $55.5 million last year, according to the papers. He sold all but $1.3 million of that stock in May, three months before HealthSouth's stock began falling after the company announced a Medicare reimbursement problem would hurt earnings.

The government now contends the claim about Medicare was part of the long-running fraud scheme engineered by Scrushy.

In a new allegation added to the SEC suit Thursday, the government accused Scrushy of insider trading. It claimed he sold at least 13.8 million shares of HealthSouth stock worth more than $170 million since 1991 based upon his knowledge of the company's true results.

The SEC can seek penalties including tripled damages from Scrushy if it wins the lawsuit.

The size of the alleged scheme has almost doubled since the SEC first filed suit last month.

Documents filed by prosecutors Thursday in the case of one of the HealthSouth executives to plead guilty to criminal charges show the health care giant overstated earnings by $440 million in 1997 and $635 million in 1998 nearly $1.1 billion over two years.

That was in addition to the $1.4 billion in inflated earnings since 1999 first claimed by the SEC.

Scrushy's newest lawyer said his client has done nothing wrong.

"A handful of bureaucrats in Atlanta and Washington have used indiscriminate government power to cause massive collateral damage to HealthSouth and to shame Richard Scrushy," attorney Donald V. Watkins told The Birmingham News in a story published Friday.

While huge, the HealthSouth scandal is still smaller than the one engulfing WorldCom Inc., a Mississippi-based telecommunications company that admitted to a $9 billion accounting fraud.

Suspended from the New York Stock Exchange, HealthSouth stock sold for 12 1/2 cents in over-the-counter trading Friday. The company's stock sold for more than $30 a share just five years ago.

HealthSouth describes itself as the largest U.S. provider of diagnostic imaging, outpatient surgery and rehabilitation services. The company has nearly 1,700 locations in all 50 states and abroad.


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