Congress launched its own investigation into HealthSouth Corp. on Tuesday by demanding thousands of documents from the Birmingham company and its former auditor, Ernst & Young.
The probe by the House Energy and Commerce Committee expands the unfolding scandal from the courtrooms of Birmingham to Capitol Hill. The committee has a history of summoning key figures in corporate meltdowns for high-profile hearings, sometimes uncovering evidence not disclosed during the criminal investigation and putting former CEOs on the spot.
Hearings are expected this summer, and committee spokesman Ken Johnson said the major players, including ousted CEO and founder Richard Scrushy, will be asked to testify. If they refuse, they’ll be subpoenaed.
“The primary focus is HealthSouth. Where was the HealthSouth board during all this? Was everybody busy schmoozing with Scrushy and they failed to notice the building was burning down around them?” Johnson said.
The committee’s request was sent in writing Tuesday to the acting chairman of HealthSouth’s board and the chairman of Ernst & Young in New York. The letters were signed by the top four Republicans and Democrats on the committee, including its chairman Rep. W.J. “Billy” Tauzin, R-La., and ranking member Rep. John Dingell, D-Mich.
No members of Alabama’s delegation are on the panel.
Based on the type of documents requested from HealthSouth, the committee appears to be focusing on whether internal accounting practices were shabby, oversight by the company’s board was weak or compromised, Medicare was defrauded, and the company’s external auditor was less than diligent. Congress has oversight over all such issues.
The Securities and Exchange Commission sued Scrushy and HealthSouth last month, accusing them of inflating profits by $1.4 billion to meet Wall Street forecasts. The agency also accuses Scrushy of insider trading, claiming he sold $175 million in stock, which the SEC contends are spoils of the fraud. The SEC’s claim in its civil suit is $786 million. Ten former HealthSouth executives have agreed to plead guilty to criminal charges related to the fraud, and the investigation continues.
Statements from HealthSouth and Ernst & Young indicate they plan to cooperate with the congressional investigation. The panel set a May 6 deadline for the records to be turned over.
The documents requested from HealthSouth are lumped into 29 categories, including records related to HealthSouth’s and Scrushy’s relationships with affiliated companies, and reams of internal company communications. There’s also a request for a copy of the company’s document destruction policies since 1986, and records relating to the “consideration, development or implementation” of electronic surveillance systems in the company’s Birmingham headquarters.
“Frankly, some of the financial dealings between the board members raise a lot of serious questions,” said Rep. Jim Greenwood, R-Pa., and chairman of the oversight subcommittee. “I can’t wait to hear what these guys have to say under oath. Whose interests were they looking after, their own or their stockholders?”
Hearings before the energy and commerce committee have provided some of the more dramatic moments in the recent era of corporate scandals, including blistering interrogations of former Enron Corp. executives. But while that drama has been lauded by consumer groups as a way to expose wrongdoing and inform shareholders, criminal defense attorneys and corporations have been critical of the political angle.
“You’re always going to get lot of political grandstanding on Capitol Hill, so that’s a big element of it,” said Larry Sabato, director of the Center for Politics at the University of Virginia. “But there’s a serious side, too. What happens on Capitol Hill educates lawmakers, the public and the press and that alone is worth the price of admission.”
Joan Claybrook, president of Public Citizen, said Tuesday that Tauzin’s hearings in 2000 about flaws in Firestone tires and the Ford vehicles they were on not only shed light on the subject, but led to new, tougher consumer protection laws.
“Everyone thinks they understand corporate crime, but they really don’t. You need the inside story, and in these hearings it’s presented face to face to members of Congress who are supposed to represent the public and often take corporate contributions,” Claybrook said.
Johnson, the committee spokesman, said the investigation is parallel to, but not in cooperation with, the federal probe under way in Birmingham. However, in the investigation of Martha Stewart and alleged insider trading related to shares of ImClone stock, the committee eventually turned its findings over to the U.S. Justice Department.
“Congress passes a new law and somebody tries to figure out a way around it the next day. That’s why it’s so important for us to completely understand how this and other accounting scams worked,” Johnson said. “Ideally, we stay one step ahead of the crooks instead of one step behind.”
U.S. Sen. Richard Shelby, R-Ala., said he supports the federal investigation into HealthSouth. “I believe the House commerce committee’s hearings will also prove instructive particularly their examination of possible Medicare and Medicaid fraud,” he said.
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