Scrushy Bogus Earnings. While embattled HealthSouth Corp. prepares to ask the Internal Revenue Service for a refund of “up to $300 million” for taxes paid on allegedly bogus earnings, the IRS is believed to be taking a closer look at ousted founder Richard Scrushy’s personal fortune.
Scrushy, who was fired as HealthSouth’s CEO in March, and other former executives at the Birmingham-based operator of physical therapy and outpatient surgery facilities nationwide “may have their own personal tax issues,” say Selva Ozelli, an analyst with the New York-based Research Institute of America, which specializes in tax issues. “They were cooking the books, and so their options were overvalued.”
Similarly, she says, likely so too were performance-based bonuses issued to the executives over the years.
Scrushy’s 2002 W-2, included in Securities and Exchange Commission filings against HealthSouth and its founder, shows his salary and bonuses for the year topped $68 million. By way of comparison, Warren Buffett whose investment and insurance company Berkshire Hathaway recently reported record earnings last year had total compensation of $300,000.
“Last year was a very bad year (on Wall Street), and what does the (HealthSouth) CEO do?” Ozelli says. “He takes home his biggest paycheck ever.”
Also, last year, according to documents provided by the company to the SEC, Scrushy sold nearly 6.35 million options for a pre-tax gain of about $55.46 million. The HealthSouth documents do not include 2.5 million shares Scrushy also sold last year to repay a $25 million company loan.
All in all, Scrushy enjoyed a pre-tax gain of at least $175 million from selling company-granted shares between February 1991 and this past September.
His W-2s from 1998 the year the SEC says HealthSouth accountants, at the behest of the executive team, began artificially inflating earnings by as much as $2.5 billion overall – through 2002 show combined salary and bonuses of more than $97 million.
The HealthSouth documents don’t show Scrushy’s pay prior to 1998, nor do they reflect any gains he may have enjoyed from the myriad private companies he is involved with, from investments to real estate management.
Roadblocks under construction
HealthSouth’s new management team led by turnaround specialist Bryan Marsal, a founding partner of New York-based Alvarez & Marsal Inc. awaits audit results regarding the company’s true worth before filing with the IRS and potentially the cash-strapped state of Alabama for refunds on taxes the business paid on its allegedly bogus earnings.
An internal audit and a separate forensic audit that are being conducted by PricewaterhouseCoopers LLP “should be completed by the end of June,” says HealthSouth spokesman Andy Brimmer.
“Once the company has confirmation of the actual losses from the accounting fraud, if a refund is warranted, the company will be applying for all relevant federal and state tax refunds.”
Still, winning a federal tax refund is no sure thing. The Wall Street Journal earlier this month noted that “tax refunds for restated earnings can be justified, but the IRS will be under pressure to take a second look at some of the aggressive tax shelters these companies used. Moreover, any refund in excess of $2 million” well below HealthSouth’s proposed $300 million request “has to be reviewed by the Congressional Joint Tax Committee.”
Nor is such a refund likely to be approved anytime soon if ever. The Wall Street Journal noted that the Congressional Joint Tax Committee “has spent much of the past year studying Enron’s taxes.”
Enron, a Houston-based oil and gas company, similarly is under federal fire for financial shenanigans that cost investors billions of dollars.
Also compounding HealthSouth’s efforts to recoup the overpayments to the IRS is a measure being considered by the U.S. Senate Finance Committee that would give the government authority to pursue executives involved in accounting improprieties and require them to fork over any refunds themselves.
Despite the higher corporate taxes brought about by artificially inflated earnings, the boost to the bottom line made the alleged scheme seemingly worthwhile at the time.
After all, Ozelli says, “every time you rig the books by a dollar, the tax implication is only 11 cents.”
The rest goes to the bottom line and artificially helps meet Wall Street expectations, the presumed rationale behind the alleged HealthSouth fraud.
An entangling scandal
Scrushy’s woes began shortly after he announced late last August that the company was reducing its 2002 earnings expectations by $175 million because of a clarification in Medicare reimbursement rates. The government contends that was a canard intended to begin deflating HealthSouth’s artificially high earnings.
The SEC in September announced that it was looking into the timing of Scrushy’s insider stock sales and subsequently expanded its investigation into the company’s bookkeeping practices.
To date, 11 former HealthSouth employees, including all five chief financial officers in the company’s history, have pleaded guilty to accounting fraud and other charges. Scrushy has not been charged with a crime. He was, however, named in the ongoing SEC investigation into the company’s accounting practices and his role in them.
The U.S. Justice Department is pursuing criminal charges based on the accounting irregularities and also is relying on last year’s federal Sarbanes-Oxley Act, which holds corporate executives accountable for the financial statements they provide to the SEC.
HealthSouth is the so-called “Sarbox” law’s first test case, and the HealthSouth scandal is entangling others.
To wit, firms doing business with HealthSouth during the years the allegedly phony earnings were recorded now find themselves under scrutiny.
KPMG, which provided HealthSouth with tax advice, and Ernst & Young, which audited HealthSouth’s books, have attracted federal attention. HealthSouth’s new management team has replaced Ernst & Young with PricewaterhouseCoopers.
Need Legal Help Regarding Scrushy?
The personal injury attorneys at Parker Waichman LLP offer free, no-obligation case evaluations. For more information, fill out our online contact form or call 1-800-YOURLAWYER (1-800-968-7529).
New York | Brooklyn | Queens | Long Island | New Jersey | Florida
Call us at: 1-800-YOURLAWYER (800-968-7529) | Schedule your free consultation
