Five HealthSouth Corp. officers yesterday agreed to plead guilty to conspiring to inflate company earnings and will help prosecutors investigating fired chief executive officer Richard Scrushy.
Admissions by the five will bolster testimony of three other HealthSouth executives who have pleaded guilty to fraud and are aiding prosecutors in their probe of Mr. Scrushy.
The U.S. Securities and Exchange Commission has accused Mr. Scrushy and HealthSouth, the largest U.S. operator of rehabilitation hospitals, of inflating earnings by at least $1.4-billion (U.S.) and assets by $800-million.
Charged yesterday were: Rebecca Kay Morgan, 35, group vice-president, accounting; Cathy Edwards, 39, vice-president, asset management; Kenneth Livesay, 42, chief information officer; Angela Ayers, 33, vice-president, finance and accounting; and Virginia Valentine, 33, assistant vice-president, finance and accounting.
“These individuals trusted upper management, but they still participated in this fraud,” U.S. Attorney Alice Martin said at a news conference in Birmingham. “What was driving the fraud from the top was clearly a desire to meet Wall Street’s expectations and have the earnings per share that the analysts were projecting.”
All five executives agreed to plead guilty to conspiracy to commit wire fraud, securities fraud and filing false records, Ms. Martin said. The five will co-operate with prosecutors investigating Mr. Scrushy and help HealthSouth with a forensic audit of its books, she said. None the executives was available for comment.
“The way we are handling this investigation is going to be an assistance to HealthSouth in trying to avoid bankruptcy,” Ms. Martin said. “We have made an extensive effort to try to assist a corporation that is co-operating in this investigation.”
HealthSouth has hired lawyers and turnaround specialists to help the Birmingham-based company avert bankruptcy. The company defaulted on $367-million in bond and interest payments this week, postponed its annual shareholders meeting and said it would not be able to file its annual report to the SEC on time. The company said yesterday that it would cut 165 workers from its 830-employee headquarters staff to cut costs to help avoid bankruptcy.
The investigation of Mr. Scrushy and other HealthSouth executives began as an insider-trading probe last year and transformed into an accounting-fraud case last month, Ms. Martin said. The insider-trading case is “on the back burner” while prosecutors pursue accounting-fraud allegations, she said.
“We expect that additional criminal charges will be filed against finance employees who are currently co-operating” with prosecutors and have not been charged, Ms. Martin said in an interview. “It’s moving at warp speed.”
“One reason that the guilty pleas are coming in a fast and furious manner is because the underlying conduct is so egregious and relatively easy for the government to establish,” said Christopher Bebel, a former SEC attorney.
Two former chief executive officers, Weston Smith and William Owens, pleaded guilty last month and implicated Mr. Scrushy in an accounting fraud dating back to 1986. Assistant controller Emery Harris also pleaded guilty. All three men are co-operating with Martin’s office.
Mr. Scrushy founded HealthSouth in 1984 and used acquisitions to build a company with 51,000 employees and 1,700 facilities in 50 U.S. states.
The fraud detailed in the new charges extended back earlier than previously alleged by the other three executives, Ms. Martin said. The charges against Mr. Livesay, the former assistant controller, state that HealthSouth overstated pretax income by $635-million in 1998 and by $440-million in 1997, according to court papers.
By 1998, the difference between HealthSouth’s actual earnings and those reported to the SEC “had become very large and was growing larger,” the papers said. HealthSouth’s treasury employees described the situation as “one of burning through cash,” and the company was forced to borrow money from banks to pay income taxes, the papers said.
FBI agents are trying to identify Mr. Scrushy’s assets to determine if any were derived from a crime. Investigators are looking at the relationship between HealthSouth and two medical firms in which Mr. Scrushy invested, MedCenterDirect Inc. and Source Medical Inc., they said.
HealthSouth said Mr. Scrushy should return any salary or bonuses he earned if the federal investigations prove he inflated earnings on which his compensation was based. The SEC may also demand that Mr. Scrushy forfeit any profits he made as a result of inflating earnings or assets. HealthSouth fired Mr. Scrushy, 50, as CEO and chairman.