Last summer, HealthSouth Corp. and Chief Executive Richard Scrushy were out to impress folks.
The stock price had fallen about 20 percent. Scrushy was trying to persuade Wall Street analysts, who tell the public to buy a stock or not, that the drop was temporary.
Kemp Dolliver, a stock analyst for SG Cowen in Boston, was invited to Birmingham with more than a dozen rivals. He had little time to digest the financial information HealthSouth was touting, what with the videos about Scrushy’s life and vision and the visit to the “trophy room” with dozens of awards to Scrushy from cities, charities and music organizations.
“I had never seen anyone in the business world who had built such a shrine to himself,” Dolliver said. “It wasn’t a good sign.”
Anyone who doubted Scrushy and the company before last month now has support for those feelings. Scrushy faces a lawsuit filed by the Securities and Exchange Commission that says he ordered lower executives to lie about how much money the company was making. Those executives inflated profit by $2.5 billion since 1997, according to the government regulatory agency and federal prosecutors.
Now, people are wondering about Scrushy’s legacy.
Scrushy, 50, built a business that changed the industry of physical therapy. He took the idea of strengthening and stretching injured limbs and joints from cramped hospital wards and mom-and-pop companies and packaged it for middle America.
He also paid for his chain of 1,800 clinics and hospitals in every state the nation’s largest with loans and investor money secured with what the government says were phony financial projections. He persuaded hundreds of insurance companies and Medicare, the government program for the elderly and disabled, to pay for physical therapy using the same faked information, the SEC says.
He also founded or helped direct other health care companies that have failed or are in trouble. His two largest failures, HealthSouth and the company formerly known as MedPartners Inc., cost investors $14 billion in lost market value. Most of those investors are ordinary people who bought shares in the company, or whose pension fund or 401(k) retirement plan did.
“People will say he is the poster child for corporate corruption,” said Paul Lapides, a corporate governance professor at Kennesaw State University. “He will be remembered as the person who was targeted by the government with the same vigor as Saddam Hussein.”
Scrushy’s lawyers said at hearings last week that he is innocent, and any fraud that occurred was carried out by lower executives who kept the HealthSouth CEO in the dark.
Dolliver walked away unimpressed from the meeting last year and told investors that HealthSouth shares probably would perform no better than the overall stock market. Even that less-than-enthusiastic response was too optimistic. HealthSouth shares reached a high last year of $15.90. Now, they are almost worthless.
A national brand:
Scrushy was born in Selma and tried a lot of things before founding HealthSouth. As a youth, he worked at a gas station in his hometown. He got a certificate in respiratory therapy from the University of Alabama at Birmingham in 1974. He taught courses at a community college and worked for a hospital company in Houston.
By 1984, his ambition was twitching. He looked around and saw a McDonald’s or another national chain selling something on every corner. He knew that many health care procedures could be performed more cheaply at clinics than at full-service hospitals.
He also knew that physical therapy, a discipline that gained momentum after it helped World War I veterans and polio patients improve strength and mobility, was appealing because it shortened hospital stays and got people back to work faster.
With start-up capital, Scrushy began buying small rivals and opening clinics around the Southeast. By 1986, the company first known as AmCare was ready to sell shares to the public for the first time. With an infusion of $12 million from ordinary investors and pension and mutual funds, HealthSouth, which the year before had 12 clinics and hospitals in seven states and $4.7 million of revenue, was set to explode.
“He was a positive, energetic leader,” said Tom Shinkel, a former banker at First Union National Bank who approved loans to HealthSouth in 1988. “He was a get-it-done type of leader who had a definite mental model of how the business would work.”
When Scrushy was fired last month, HealthSouth had amassed a network of clinics and hospitals in all 50 states, Great Britain, Australia and Saudi Arabia. Revenue was $4.2 billion last year, according to financial statements that are now under suspicion.
As HealthSouth grew, Scrushy aligned the company with sports stars and celebrities. The company began furnishing athletic trainers to college and high school sports teams, figuring anyone injured on the field would turn to HealthSouth for surgery and rehabilitation.
Even the most unathletic injured factory worker might show up for a therapy session and see football stars Bo Jackson or Dan Marino laboring beside them. Scrushy signed many of the star athletes the company treated to personal appearance contracts to promote the company.
“It was smart marketing,” said Linda Jones, editor of the trade magazine Advance for Physical Therapists. “You get people when they are young and healthy and they are more likely to come back to you when they are older and injured.”
The company’s reach grew with acquisitions of rivals. In 1994, HealthSouth picked up 28 therapy clinics from Tenet Healthcare, spending $350 million. It bought 33 day-surgery centers in 1998, all the while persuading patients, doctors, insurance companies and employers that physical therapy gets people back to work and play faster.
“They were able to show that physical therapy works,” Jones said. “HealthSouth brought the words `physical therapy’ into national prominence, before the general public, as never before.”
A competitive man:
Most everyone who has spent any time around Scrushy agrees he is a competitive man. He once said he wanted to be the highest-paid CEO in the world. Some say he went too far in making HealthSouth in his own image, engaging in a string of questionable business deals long before the SEC came to town.
He wasn’t afraid to cut his family in on HealthSouth’s success. The company bought $59 million of computer equipment from 1995 to 1997 from a firm called GG Enterprises that was controlled by Scrushy’s mother and brother, HealthSouth records show. HealthSouth said in SEC documents it got a good deal on the equipment.
Scrushy also invested HealthSouth money in his own business ventures, records show. Scrushy and former HealthSouth finance chief Michael Martin formed an investment firm in 1997 called 21st Century Health Ventures. HealthSouth gave the fund $10 million to invest on its behalf, company records show.
One of those investments was a $200,000 loan to a third company, called Physician Solutions Inc. Last month, Scrushy’s personal accountant told the SEC in a deposition that Scrushy was a shareholder in Physician Solutions Inc., a company that provided services to clinics.
“With HealthSouth, you just never knew where the line was between what was the CEO’s and what was the company’s,” said Doug Jones, a former federal prosecutor who is suing the company on behalf of shareholders. “That line just blurred and blurred.”
The board provided little oversight. Directors often participated in Scrushy’s outside ventures, and some had lucrative relationships with HealthSouth. Director Larry Striplin’s Birmingham glass company repaired damage to HealthSouth clinics and won a $5.6 million contract to supply contractors building a new company hospital on U.S. 280.
Another director, Sage Givens, operates Acacia Venture Partners, a San Francisco firm that supplies start-up capital to new companies. HealthSouth invested $2 million with Givens’ fund while Scrushy was CEO.
Just running HealthSouth, which grew to become a member of the Fortune 500 and the Standard and Poor’s 500 Index, was never enough for Scrushy. He founded or helped direct at least four health care companies that wound up foundering or have had recent trouble, costing investors billions in losses.
In 1993, he and HealthSouth executive Larry House founded MedPartners Inc., a Birmingham-based company that persuaded doctors to sell their practices. MedPartners said it could operate the offices and clinics more cheaply than a small doctor’s practice. The company and the physicians would then share in the revenue of the more efficiently run medical practice.
The company was once one of Alabama’s largest, with $3.5 billion in revenue in 1996, with House as the CEO and Scrushy as chairman of the board. In January 1998, it all fell apart.
Rival PhyCor Inc. wanted to buy MedPartners for $8 billion. But after examining the company’s books, PhyCor backed out. MedPartners shares plunged on suspicion PhyCor had found irregularities.
The company’s shares had sold for a high of $33.50 under House and Scrushy. They fell to a low of $2 in September 1998, by which time House had resigned and Scrushy had taken over as CEO. Investors lost more than $2 billion of market value.
MedPartners got new management after that and changed its name and business after Chief Executive Mac Crawford took over in October 1998, when Scrushy quit as both CEO and director.
The company now known as Caremark Rx Inc. has no connection to HealthSouth, has left the physician management business and concentrates only on serving as a middleman between drug companies, pharmacies and prescription customers.
Scrushy also was a director of Integrated Health Services Inc., a Maryland-based operator of nursing homes and rehabilitation centers. Scrushy left the board in 1995, and Integrated Health filed for Chapter 11 bankruptcy protection in 2000. That was three years after Integrated Health bought $1 billion of nursing homes from HealthSouth.
A lot of Scrushy’s business deals relied on the same people. Charles Newhall, a HealthSouth board member, invested with Scrushy in MedCenterDirect.com. The Atlanta medical supplies company is partially owned by Scrushy, Newhall and other HealthSouth board members and executives. HealthSouth had bought $174 million of supplies through MedCenterDirect by the end of 2001, regulatory filings show.
Michael Martin, a former HealthSouth finance chief who agreed last week to plead guilty to criminal charges of accounting fraud, founded Capstone Capital with Scrushy in 1994. The Birmingham-based company invested in health care properties including facilities owned by HealthSouth.
Scrushy was an original investor in Birmingham’s Source Medical Solutions, a software company founded by former HealthSouth Vice President Daryl Brown. The company’s first product was developed inside HealthSouth, Source Medical’s largest customer. This month, Source Medical fired 110 workers, about one-fourth of the payroll, because of lower-than-expected sales from HealthSouth’s expense cutting.
But Scrushy’s biggest mishap has been HealthSouth, which in 1998 had a market value of $12 billion. It is now worth about $50 million with shares trading at around 17 cents as the company tries to avoid bankruptcy.
Eight former executives have pleaded guilty to criminal charges and a ninth has agreed to do so, admitting they faked earnings so profit would never fall short of what Wall Street analysts had predicted.
For Scrushy, who served as chairman of the board while he was CEO, the stakes are high even if he doesn’t wind up being charged with a crime or face the prospect of prison.
“I think this is where the government war on corporate corruption starts,” said Lapides, the governance professor. “I really expect all those involved in management and the board to, at the very least, be banned for life from ever serving as an officer or director of a publicly traded company.”