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HealthSouth Heads South

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By LouAnn Lofton (TMF Bling)
March 21, 2003

One more allegedly dishonest company is under fire. Federal investigators recently charged HealthSouth's (NYSE: HRC) chief executive officer with fraud. Richard Scrushy allegedly overstated the Birmingham, Ala., rehabilitation care provider's earnings by $1.4 billion since 1999.

Hours after the FBI raided HealthSouth's headquarters Wednesday, the SEC filed charges and ordered a trading halt of the company's shares. Before the halt, HealthSouth dropped to $3.91, down 75% from the company's 52-week high. Yesterday, Standard & Poor's booted HealthSouth from its S&P 500 index.

According to the SEC's complaint, HealthSouth CEO Scrushy inflated the company's earnings in order to please Wall Street. Following a plunge from $28 to $9 in 1998 after a negative earnings report spooked the market, Scrushy allegedly told his subordinates to "fix it."

Fix it they did, figuring out ways to make earnings look better and overstating assets by claiming to have spent $800 million on medical equipment and other supplies that were never actually purchased. The company also generated fake invoices in order to convince auditors that the assets were really added. Good grief! It's so blatant that it's hard to believe the company thought it could get away with it!

The SEC said that the subordinates in question tried to talk Scrushy into stopping the fraud, but he refused. He's benefited from more than $15 million in pay and bonuses from 1999-2001, and has sold nearly 8 million shares of HealthSouth. He's now "on leave" from the company, as is its chief financial officer, William T. Owens. Both men certified the company's financials to the SEC back in August, allegedly knowing full well that they shouldn't have.

Scrushy was already under scrutiny in the eyes of many shareholders after HealthSouth warned in August that new Medicare accounting changes would hurt earnings. He sold half his stake in the company -- $25 million worth -- mere weeks before the announcement.

Now the SEC says the Medicare scare was nothing but a Scrushy-created "scheme" to lower analysts' expectations, and that HealthSouth has reported fake earnings at Scrushy's behest since 1986. Scrushy founded HealthSouth in 1984 with a couple of friends.

Dirty is as dirty does. When this much bad news flows out of a company, unfortunately, this is usually just the start. Don't stick around, waiting for the air to clear. Run, and run now.            

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