HealthSouth Corp. fired Richard Scrushy as chairman and chief executive, severing ties with its founder as a third executive pleaded guilty Monday in a mushrooming accounting scandal.
The company said Scrushy, who built HealthSouth into a leading health care chain and was previously suspended as chief executive, also was asked to quit the board.
In a further bid to wipe clean its slate, HealthSouth said it would fire longtime outside auditor Ernst & Young.
The New York-based auditing firm said it was cooperating in a federal investigation of HealthSouth, which allegedly created false financial statements and accounting entries to deceive auditors.
Attorneys for Scrushy did not return telephone calls seeking comment.
The government filed a civil lawsuit March 19 accusing HealthSouth and Scrushy of overstating earnings by at least $1.4 billion since 1999 to make it appear the company was meeting Wall Street expectations.
As the company announced Scrushy’s ouster, Emery Harris, vice president of finance and assistant controller of HealthSouth, pleaded guilty to wire and securities fraud and falsifying company records.
Under questioning from U.S. District Judge Inge Johnson, Harris said he began making false entries in early 1999 at the request of the controller or assistant controller, neither of whom he named in court.
Harris, 33, admitted attending so-called “family” meetings where HealthSouth’s senior staff discussed artificially inflating earnings. The “gap” or “hole” between the true earnings and analysts’ forecasts were made up with fake numbers called “dirt,” the charges said.
Prosecutors said Harris faces a maximum sentence of 15 years in prison and $1.5 million in fines, plus restitution and seizure of any illegal profits. Defense attorney Steve Salter said his client was likely to serve time in prison.
U.S. Attorney Alice Martin said Harris had helped the criminal probe move along quickly.
“Mr. Harris’ detailed knowledge of the mechanics of the various fraud schemes has sustained the pace of this investigation and helped identify other individuals who are involved and have knowledge of the fraud,” she said.
Also Monday, the Securities and Exchange Commission announced civil charges against Harris mirroring the criminal charges to which he pleaded guilty. The SEC also announced civil insider trading charges against two former chief financial officers William T. Owens and Weston L. Smith, who like Harris have pleaded guilty to criminal fraud charges in the case.
Scrushy’s lawyers have filed papers saying he is the target of a criminal investigation, and two former chief financial officers previously pleaded guilty to fraud charges and are cooperating with authorities.
Still more HealthSouth executives are expected to admit their guilt soon, Martin said.
The company said Scrushy’s dismissal approved unanimously by directors was retroactive to March 19, when he was placed on leave as the accounting scandal broke.
Scrushy could be forced to repay any bonuses and extra compensation based on overstated profits should the company be forced to restate its earnings, the company told him in a letter Sunday.
Scrushy did not immediately respond to the request for his resignation from the board, and other directors do not have authority to remove a director.
“If you could kick someone off the board, you would lose all your independence,” said Ernie Knewitz, a HealthSouth spokesman.
While lenders blocked the company from paying $367 million in bond and interest debt due Tuesday, moving the company closer to possible bankruptcy, Knewitz said HealthSouth is still able to pay bills for day-to-day medical operations.
“Vendors obviously are calling expressing concern, but we are assuring them we are paying,” he said. “We are operating without disrupting patient care services.”
The company is conducting an internal audit to determine its true value, Knewitz said, and it is looking at selling some “non-core” assets to raise cash.
The New York Stock Exchange suspended trading in HealthSouth shares and is seeking to delist the company. The company’s stock sold for about 8 cents a share in over-the-counter trading Monday afternoon, down from a high of more than $30 a share five years ago.
Based in Birmingham, HealthSouth calls itself the largest U.S. provider of diagnostic imaging, outpatient surgery and rehabilitation services. The company has almost 1,700 locations in all 50 states and abroad.
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