For the first time in the criminal investigation of alleged financial fraud at HealthSouth Corp., a direct link was made last week to Richard Scrushy, the company's founder and former chairman and chief executive officer.
Meanwhile, federal prosecutors and Securities and Exchange Commission officials will get some new company in their probe of Birmingham, Ala.-based HealthSouth. The House Energy and Commerce Committee last week announced it is conducting its own extensive investigation of the rehabilitation chain.
The SEC has alleged HealthSouth overstated its earnings by $2.5 billion since 1997 to meet Wall Street estimates. SEC officials have further filed additional charges against Scrushy, claiming he engaged in insider stock trading, beginning in 1991, by selling 13.8 million shares of company stock worth more than $170 million. Scrushy continues to maintain the charges are without merit.
According to a news release from the U.S. Justice Department, prosecutors filed a two-count criminal complaint in U.S. District Court, Birmingham, alleging the company's first chief financial officer, Aaron Beam, 59, and others, "including HealthSouth's chief executive officer at the time," filed false information with AmSouth Bank, Birmingham, from April 1996 to October 1997 to obtain loans and credit. The documents claim that starting in 1996, a group of senior officers at the company recognized HealthSouth was not producing sufficient earnings per share to meet or exceed analysts' expectations, and engaged in a scheme to inflate HealthSouth's publicly reported earnings and falsify its financial reports, prosecutors said.
The news release mentioned a second time that the group included HealthSouth's "then CEO," but did not name the executive. Scrushy, who has not been charged in the criminal case, was the company's CEO from its inception in 1984 until August 2002, when Scrushy relinquished the title with the intention of being CEO of the proposed surgery-center spinoff from HealthSouth. A few months later, the spinoff was shelved, and Scrushy returned to the CEO's office.
The documents were part of Beam's guilty plea, the 11th in the case and the fifth by a former HealthSouth CFO; all five of the CFOs in the company's history have now pleaded guilty in the case. Beam began as CFO in 1984 when he co-founded the company with Scrushy and others. Beam left in 1997. HealthSouth Treasurer Malcolm McVay, 41, also pleaded guilty last week to federal charges relating to accounting fraud while working for HealthSouth.
Another court highlight came when Joel Gordon, HealthSouth's interim chairman, made his first court appearance during an ongoing hearing over whether to grant Scrushy access to his personal assets, which were frozen last month; Scrushy has requested access to $70 million. Gordon, a HealthSouth director since 1996, reportedly testified that Scrushy was not a figurehead but was intimately involved in the company.
Back in Washington, the House Energy and Commerce Committee, which has investigated such scandal-ridden corporations as Enron Corp. and WorldCom, said the "financial collapse" of HealthSouth and fraud allegations raised "serious concerns about the oversight and management of the company by the board."
"It appears that HealthSouth may have engaged in improper accounting practices and falsely inflated its reported revenue and earnings as far back as 1986 ... and that company officials never investigated employee allegations of financial fraud," the committee's chairman, Rep. Billy Tauzin (R-La.), wrote in an April 22 letter to Gordon.
The committee said while it appears, to date, that HealthSouth's outside directors had no prior knowledge of the alleged accounting fraud, Congress was troubled to learn that HealthSouth's 2002 proxy statement noted the board's audit committee met only once during fiscal 2001. The committee is requesting information from HealthSouth on all communications between its board, board audit committee and former outside auditor Ernst & Young, "given certain events transpired in 2001, including HealthSouth's settlement of a Medicare fraud lawsuit with the Department of Justice."
The committee is also concerned that HealthSouth's may have overbillied Medicare and whether Ernst & Young was "diligently performing" its auditing duties. By May 6, Gordon must answer 29 questions posed by Tauzin's committee and provide thousands of documents covering seven years of financial records, as well as internal communications between HealthSouth employees who may have suspected fraud. In a separate letter, Tauzin requested documents from Ernst & Young.
HealthSouth spokesman Andy Brimmer said Gordon had received Tauzin's letter and the company is evaluating offers it has received on its acute-care hospitals in Birmingham and Coral Gables, Fla.
HealthSouth also has halted development projects with many hospitals and healthcare systems that have formed joint ventures with the company (April 7, p. 14). Some providers are holding their breath in hopes HealthSouth's financial misconduct will not affect the business partnership, while others have pulled out of deals entirely. Kevin Gross, CEO of United Regional Health Care System, Wichita Falls, Texas, said his system is dumping HealthSouth in favor of Regency Hospital Co., Alpharetta, Ga., to operate a 40-bed long-term acute-care hospital-within-a-hospital at United.
"We went through a proposal process last summer and got down to Regency and HealthSouth, and chose HealthSouth from the comparable proposals because they have a rehabilitation hospital here in town," Gross said. "But since HealthSouth has had their problems, we decided to go in a different direction and went back to Regency."