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UBS' OWN GRUBMAN

Apr 4, 2003 | The New York Post UBS Warburg had Wall Street's most bullish research on HealthSouth while UBS bankers were raking in millions in fees for deals done for the scandal-plagued company.

Analyst Howard Capek waited until March 21 two days after the SEC accused HealthSouth and CEO Richard Scrushy of "massive accounting fraud" to downgrade HealthSouth from a "strong buy" to an "reduce," a signal to dump the stock.

Capek has since dropped coverage.

Capek's belated downgrade and UBS's overall bullishness raise questions about whether UBS Warburg's research was influenced by its all-star healthcare banking group, lead by Ben Lorello.

UBS is already a party to Wall Street's pending global settlement over tainted research.

Lorello's team has been HealthSouth's principal bankers for more than 15 years, first at Salomon Smith Barney and then at UBS Warburg, where Lorello and his team moved in March 1999 for a reported $70 million payday.

Lorello's team managed more than $6.5 billion in mergers and acquisitions, $1.2 billion in equity offerings and $3 billion in debt for HealthSouth since 1990, according to CommScan Dealogic.

"It seems like some of the banks didn't learn anything from the past two years," says CEO Kei Kianpoor of Investars, which tracks the performance of analysts' stock picks. "I thought they were done with this."

A UBS spokeswoman denied the bankers exerted any undue influence on research.

HealthSouth, one of the leading rehabilitation hospital companies, is now the target of a federal fraud investigation.

The company has been accused of inflating its earnings by at least $1.4 billion since 1999, and also of overstating its assets by as much as $800 million.

Federal regulators investigating the company's accounting fraud may subpoena Lorello and HealthSouth's accountants.

"The commission has made it clear in accounting fraud cases it would look at the role of market professionals," says Richard Murphy, assistant district administrator for the SEC's Atlanta office.

He would not confirm if the subpoenas had been issued.

Lorello's group, and banker William McGahan in particular, was very close to Scrushy and HealthSouth.

"When HealthSouth made a request for information," says one person that has worked with the team, "everyone dropped everything."

Indeed, McGahan who is known for belittling his employees and riding around the office on a Razor scooter counted HealthSouth as one of his top clients.

UBS was not the only firm that waited until the last minute to downgrade the stock. Deutsche Bank, which has co-managed a $1.6 billion in debt deals alongside UBS Warburg, also waited to downgrade the stock until late March, and has also dropped coverage.

But the majority of firms on the street were far more skeptical about the stock.

According to Investars, Salomon Smith Barney downgraded from "outperform" to "in-line" on Aug. 28, 2002, when the stock was at $6.43, and from neutral to underperform on Sept. 7 at $5.30.

J.P. Morgan Chase downgraded from a buy to market underperform on Aug. 27, 2002, at $6.50.

Lorello is a legend in the healthcare world. Known for being fiercely intense and aggressive, he has been known to put heavy pressure on small and mid-cap companies to do business with the bank.

"What always struck me as odd," said one healthcare executive, who asked not to be named, "was that he continued to have high market share even though his companies kept blowing up."

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