To the list that starts with Enron Corp. and WorldCom, you can now add HealthSouth Corp., the U.S. Securities and Exchange Commission alleged today. The SEC said it filed a civil lawsuit in U.S. District Court in Birmingham, Ala., where HealthSouth is based, alleging the company has overstated its operating earnings by at least $1.4 billion since 1999. The SEC alleged in its complaint that HealthSouth's "massive overstatement" of earnings was ordered by Richard Scrushy, the company's founder, chairman and CEO, to ensure that the company met the earnings estimates of Wall Street analysts -- and thereby maintained the value of the company's shares. To cover up the earnings overstatement, the SEC said, HealthSouth inflated the value of the assets on its balance sheet by at least $800 million.
Meanwhile, former HealthSouth CFO Weston Smith has agreed to plead guilty to securities fraud, conspiracy to commit securities and wire fraud, and false certification of financial records, the U.S. Department of Justice said. HealthSouth's only comment thus far has been to acknowledge that FBI agents raided its Birmingham headquarters last night and served grand jury subpoenas on the company and several of its employees.
The SEC's civil complaint alleges that HealthSouth, at Scrushy's instruction, has been inflating its earnings since shortly after the company went public in 1986. Each quarter, the complaint said, senior executives would report the company's actual results to Scrushy, who would then instruct them to make artificial accounting journal entries to make up the difference between the results and analysts' expectations. -- by Vince Galloro