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UBS Helped Set HealthSouth Moves Leading to Scandal

May 14, 2003 | Wall Street Journal UBS Warburg's top health-care investment bankers helped HealthSouth Corp. make management and business decisions in the years leading up to the company's accounting scandal, Wednesday's Wall Street Journal reported, citing newly released documents.

The disclosures show that UBS, a securities firm that is struggling to rebuild its reputation amid regulatory fallout on Wall Street, was far more involved in the inner workings of HealthSouth than previously disclosed and maintained an unusually close relationship with HealthSouth's embattled founder, Richard Scrushy.

The Justice Department is pursuing a criminal investigation into the alleged fraud, while the Securities and Exchange Commission has been pursuing civil claims. Mr. Scrushy, through his attorneys, denies any wrongdoing and hasn't been criminally charged. A federal grand jury is currently investigating the fraud allegations at HealthSouth.

There are no indications that UBS, a unit of Swiss bank UBS AG, was aware of any alleged fraud or accounting irregularities at HealthSouth. But according to the minutes of HealthSouth board meetings released as part of a federal-court hearing in Birmingham, Ala., Benjamin Lorello and William McGahan, the co-heads of UBS's health-care investment-banking team, attended a combined total of at least eight HealthSouth board meetings between late 1999 and late 2002. During the meetings, which were sometimes held at resorts, Messrs. Lorello and McGahan helped guide the company on everything from financing and investor sentiment to a "detailed overview of strategic alternatives" for the company's "long-term objectives."

And just weeks before an SEC investigation into HealthSouth became public, in September 2002, several UBS bankers presented a plan called "Project Crimson," which called for breaking up the company and selling off divisions. If successful, the plan might have helped HealthSouth avoid disclosure of the alleged accounting fraud.

UBS says that it was one of several securities firms that had a relationship with HealthSouth and that "it is not inconsistent that a representative of an investment bank would occasionally make a presentation to a board meeting when invited by a client to do so."

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