The Securities and Exchange Commission on Monday added to the woes at HealthSouth Corp. by charging two former CFOs with insider trading and taking part in at least $1.4 billion in accounting fraud, federal officials say.
The SEC also filed fraud charges against the current accounting chief for the embattled Birmingham, Ala.-based operator of rehabilitation and ambulatory surgery centers.
With the possibility of bankruptcy looming over HealthSouth, the company subsequently announced it has postponed the annual meeting of shareholders that had been set for May 15 and will be late in filing its 10-K annual report.
In a civil complaint lodged Monday in the U.S. district court in Birmingham, the SEC says the two former CFOs, William Owens and Weston Smith, "made or directed other HealthSouth employees to make false accounting entries to inflate reported operating results in order to meet or exceed Wall Street earnings expectations," under orders from CEO and Chairman Richard Scrushy.
The SEC says Owens and Smith engaged in illegal insider trading by profiting from the sale of HealthSouth stock when, according to the government, they knew that HealthSouth had misrepresented its financial condition.
Smith already has agreed to plead guilty to securities fraud charges and cooperate with a criminal investigation against the company.
The SEC also says Emery Harris, HealthSouth group vice president for accounting and assistant controller, faces allegations that he participated in the earnings scheme, though he is not charged with insider trading.
Federal officials are asking the Birmingham court to impose civil monetary penalties against Owens, Smith and Harris, to order the repayment of any ill-gotten gains and to bar the former HealthSouth executives from ever serving as officers or directors of other publicly traded companies.
Scrushy, whom HealthSouth fired Monday, was charged March 19 with orchestrating "massive fraud" by encouraging HealthSouth to overstate its earnings by at least $1.4 billion and its assets by $800 million since 1999.
The company subsequently was delisted from the New York Stock Exchange, retained the services of a restructuring firm and fired Ernst & Young as its auditor.
Meanwhile, two companies that insure HealthSouth executives against investor lawsuits have gone to court seeking to invalidate contracts with HealthSouth. Federal Insurance Co. and Executive Risk Indemnity, both subsidiaries of Chubb Corp., Warren, N.J., last week asked a Delaware judge to rescind coverage for HealthSouth.