HealthSouth Corp., Birmingham, Ala., its reputation and finances damaged by massive accounting fraud, is attempting to remake itself on many levels. The fraud, which an internal company audit has estimated at $3.4 billion to $4.8 billion over seven years, is the subject of an ongoing federal investigation. According to the company report, the fraud "was by any standard both enormous and complex. Its concealment . . . required considerable effort and, in some cases, luck."
As the rehabilitation provider and surgery center chain tries to recover, several former company officials have pleaded guilty to participating in the fraud, and the government has indicted Richard Scrushy, HealthSouth's founder and former chief executive officer, on 85 criminal counts. The case against Scrushy is pending. A report on the status of HealthSouth's recovery and the government's case follows:
June 23: HealthSouth again drew from HCA's pool of top executives for its new management team, naming Mike Snow, president of HCA's $2 billion Gulf Coast division, as its new chief operating officer, effective June 30. Snow, 49, joins HCA's former eastern group president, newly appointed HealthSouth CEO Jay Grinney, in attempting to repair the company's finances and reputation. In his 24-year healthcare career, Snow also has been CEO of a Tenet Healthcare Corp. hospital in Louisiana and has held positions at Universal Health Services and Humana. He was 2002-03 chairman of the Texas Hospital Association.
In another step in building a new management team, HealthSouth is expected to name a new board chairman shortly, most likely Robert May, a current director and the company's former acting CEO. Acting Chairman Joel Gordon, who agreed to serve in the position during the company's turnaround and until a permanent management team could be named, is expected to remain a director and receive the chairman emeritus title.
Grinney, 53, took the helm at HealthSouth May 10 after being unanimously appointed by the board. A former chairman of the Federation of American Hospitals, Grinney joined HCA in 1990 and became president of its 91-hospital, 10-state eastern group in 1996. HCA carried out its own corporate overhaul in the late 1990s amid a federal investigation into its Medicare billing practices. The company ultimately paid the U.S. government $1.7 billion to settle civil and criminal claims against it.
June 22: HealthSouth said it had obtained all required consents for proposed amendments and waivers to conditions on its $2.6 billion to $2.7 billion in public debt. The consents, for which HealthSouth will pay investors $73 million to $80 million, eliminate a threat that investors may demand early repayment of the company's debt.
HealthSouth has been working for months to reach an agreement with noteholders that would free the company from certain financial reporting requirements while it reconstructs its balance sheets. The company hasn't filed financial reports with the Securities and Exchange Commission since the third quarter of 2002, a technical default of debt terms, and has said it does not expect to do so until 2005. Key groups of noteholders rejected HealthSouth's initial $26 million offer to ignore the violations and its subsequent $35.6 million offer.
Richard Scrushy case
August 17: Jury selection is scheduled for Jan. 5, 2005, in the federal fraud case against Scrushy, according to documents filed in U.S. District Court in Birmingham. A pretrial conference is scheduled for Nov. 29. The case has been postponed from previous scheduled starts in January, February and August of this year because lawyers said they needed more time to prepare and because of a scheduling conflict. U.S. Attorney Alice Martin, the lead federal prosecutor, said there could be further delays.
June 17: Scrushy's defense made its case for dismissing three key charges against Scrushy stemming from the Sarbanes-Oxley Act, which was created in 2002 in the wake of scandals at Enron Corp. and corporations and was designed to hold CEOs personally liable for false financial reporting. Scrushy is the first to be charged with violating the law. In arguments before U.S. District Judge Karen Bowdre in Birmingham, Scrushy attorney Thomas Sjoblom called the law "unconstitutional on its face." Bowdre said she hoped to rule on the matter within two weeks.
Scrushy's defense previously sought the dismissal of 78 of the 85 counts against Scrushy, arguing that the November 2003 indictment could have been reduced to eight charges but was inflated to make Scrushy look particularly bad. The court let the indictment stand.
Bowdre is expected to set a new start date for Scrushy's trial by mid-August. The trial start has been pushed back three times, from Jan. 5, Feb. 2 and Aug. 23 of this year, because of the volume of materials involved. Scrushy's defense has said the trial will involve millions of pages of documents, in addition to e-mails, audiotapes and videotapes, and could last for months. In the last delay, the calendar of Scrushy's defense team also played a role. Bowdre has said she expects to reschedule the trial to start Sept. 27 or alternatively Jan. 5, 2005. Scrushy is free on a $10 million bond.
Case against other officials
June 19: Former Chief Financial Officer Michael Martin, 42, was sentenced to six months of home detention, fined $50,000 and ordered to forfeit nearly $2.4 million in misbegotten gains. Martin, who pleaded guilty to conspiracy to commit wire and securities fraud and falsifying financial information, was the 10th former HealthSouth executive to be sentenced in the ongoing investigation. Federal prosecutors had asked U.S. District Judge U.W. Clemon in Huntsville, Ala., to sentence Martin to a five-year jail term.
Earlier in June, Clemon sentenced former HealthSouth Assistant Controller and Chief Information Officer Kenneth Livesay, 43, and former CFO Malcolm McVay, 42, to five years' probation each for falsifying financial information. Clemon also ordered both men to serve six months of home detention, pay a $10,000 fine and forfeit money gained through the fraud. Livesay will forfeit $750,000 and McVay will forfeit $50,000.
Also sentenced in June were Richard Botts, 45, former senior vice president of taxes, and Catherine Fowler, 37, former vice president of treasury and cash manager. Prosecutors had been seeking a three-year prison term for Botts, who received six months of home detention for providing false tax information and was fined $10,000 and ordered to forfeit $265,000. Prosecutors recommended that Fowler receive six months in prison; she received two years of probation and a $5,000 fine.
Of the executives sentenced so far, only Emery Harris, 33, former vice president of finance and assistant controller, has received a prison term. Harris, who pleaded guilty to a charge of conspiracy and willfully falsifying books and records, was sentenced in December 2003 to a five-month prison term, three years of supervised release, including five months of home detention, and a $3,000 fine. He also was ordered to pay $106,500 in restitution. He had faced the possibility of 15 years in prison and $1.5 million in fines.
Also sentenced in December were three former vice presidents -- Angela Ayers, 34, Cathy Edwards, 34, and Rebecca Kay Morgan, 56 -- and a former assistant vice president, Virginia Valentine, 33. Each received four years of probation, six months of home detention and $2,000 fines. Morgan also agreed to pay $235,000 restitution out of her HealthSouth stock and options. All four pleaded guilty to conspiracy to commit wire and securities fraud. Edwards and Morgan also pleaded guilty to wire fraud.