HealthSouth Corp. Chief Financial Officer William T. Owens admitted falsifying financial statements, becoming the second company executive to plead guilty and help a federal investigation of the biggest U.S. operator of rehabilitation hospitals.
Owens admitted he began conspiring in 1996 with Chief Executive Officer Richard Scrushy to inflate HealthSouth earnings. The Securities and Exchange Commission accused HealthSouth and Scrushy last week of overstating profit by $1.4 billion since 1999.
HealthSouth operates 1,700 centers for physical therapy, outpatient surgery and diagnostic imaging, including dozens in the Chicago area.
Owens’ plea will help prosecutors build their case as more employees agree to cooperate and legal actions mount. Vanguard Group, one of HealthSouth’s biggest investors, said it would join a lawsuit against the company, which is struggling to cover $345 million in bonds that come due Tuesday and avoid bankruptcy.
“It’s a disaster,” said Tom Eck, a fund manager for U.S. Bancorp, which held 1.3 million HealthSouth shares in December, according to Bloomberg data. “It’s one thing to fall on hard times and under-deliver. It’s a whole other thing to lie through your teeth for years on end.”
Owens and Scrushy were placed on leave, and HealthSouth spokesman Ernie Knewitz said after the guilty plea the company is moving to fire Owens.
Former CFO Weston Smith pleaded guilty last week and is helping investigators unravel the alleged fraud. Owens, 44, faces as many as 30 years in prison and a fine of $5.5 million. He is helping prosecutors in a bid for leniency at sentencing.
Vanguard, the second-largest U.S. mutual fund company, will join a shareholder litigation that seeks class-action status.
The $15 billion Vanguard Health Care Fund held 7.6 million HealthSouth shares as of September, according to Bloomberg data.
HealthSouth shares, which sold for $15.69 last May, began trading over the counter Tuesday after the New York Stock Exchange announced plans to delist the company. The shares were unchanged Wednesday at 11 cents.
Owens told investigators that in the fall of 1997 Scrushy told him to “continue falsifying HealthSouth’s books” because the CEO planned to sell HealthSouth stock and “he wanted to maintain the stock’s current level,” court papers said.
Scrushy sold a total of 11.8 million shares of HealthCare stock for $108 million in November 1997 and $99 million last year.
Prosecutors said Owens met with Scrushy and Smith to persuade Smith to certify a false statement on HealthSouth’s second-quarter performance last year. Smith admitted he signed a false statement on Aug. 14 that overstated gross assets by $1.5 billion and cash by $300 million.
In separate proceedings, U.S. District Judge Inge Johnson imposed a $15,000 limit Tuesday night on Scrushy’s spending until she reviews a freeze on his assets on April 9. Scrushy’s lawyers agreed to the limit, which is equivalent to less than $400,000 annually. Scrushy’s salary was $3.96 million in 2001, the last year reported to the SEC.