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The Accountancy Fraud

Introductory page
This corporate web site addresses the issues of corporate health care within a broad framework. A web page describing this broad context should be considered as an introduction to each page on the web site. If you have not yet read it then
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Content of this page
This page addresses the allegations made about the accounting fraud and uses brief comments and several extracts from the many press reports to tell the story. The accounting fraud is the central issue but it is only one of the areas of concern.


Note that Mr Scrushy was eventually charged with fraud but was acquitted by the jury in a criminal trail. The prosecution could not persuade the jury beyond reasonable doubt.

"Some of my clients who can't compete with HealthSouth tell me they don't understand how HealthSouth can keep their costs that low," said Phyllis Costanza, a senior manager at Fairfax, Va.-based Lewin Group, which does consulting for post-acute-care firms. "And the answer we see now is, they can't."

"HealthSouth is really a good corporate citizen," Alexander said. "HealthSouth has never been involved in any of the national health-care scandals.
MONEY & MEDICINE State probes purchase of hospital share; The Providence Journal-Bulletin March 6, 1999

HealthSouth is now confronting a loss of faith on many fronts. Caught squarely in the glare of post- Enron scrutiny, the company is facing questions not just about the quality of its services, but about its financial practices, insider stock sales, business dealings among company officials and the independence of the board.
A spokeswoman for HealthSouth said "the company is committed to transparency and will address any and all allegations fully" at the conference call today. She added that the company was taking steps to ensure that it meets the highest standards of corporate governance.
Growing Concerns on the Health of HealthSouth, New York Times September 19, 2002

The large number of employees with knowledge of an accounting scheme that reportedly went on for more than 15 years but accelerated in scope from 1999 to 2001 has prompted questions of how the practices were kept secret for so long. HealthSouth's executives and accountants privately urged Mr. Scrushy to stop inflating earnings but publicly refrained from revealing details of the company's inner workings, federal investigators said.
The company's surveillance methods were so thorough, he said, that he and other officers would go to restrooms at the corporate headquarters to have confidential conversations. "The paranoia level was very high," the former executive said.
Regulators describe periodic efforts by other executives - - - - to persuade Mr. Scrushy to stop the manipulations. "Scrushy insisted that the scheme continue because he did not want HRC's stock price to suffer," the S.E.C. complaint said.

HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 22 2003

HealthSouth seems to have been Georges Seurat. HealthSouth ledgers were rendered in tiny, carefully aimed daubs that produced a stunning effect when one stepped back from the canvas: at least $1.4 billion in phony earnings, according to the Securities and Exchange Commission.
HealthSouth talent is said to be in its sleight of hand The Baltimore Sun April 13, 2003



Hiding the Fraud

Unmasking the fraud

Progress of the investigation

The extent of the fraud




HealthSouth's alleged fraudulent practices had many facets and I have devoted separate pages to these. This page is devoted to the most publicised fraud, the fraud which defrauded shareholders rather than tax payers and patients. This defrauding of shareholders creates more news interest and angst than the physical and mental suffering of citizens.

According to the US Securities and Exchange Commission (SEC) the accounting fraud may have started soon after or even before the company went public in 1986 but the allegations made public to date extend back only to 1993 and the court actions to 1997.

Court documents filed by ousted chief executive and chairman Richard Scrushy show the government has subpoenaed records dating to 1984, the year he founded HealthSouth as a medical rehabilitation company.

The government has sought personal financial information about Scrushy from AmSouth Bank, First Commercial Bank, UBS PaineWebber and Marin Inc., a private corporation he controls, court records show.
HealthSouth probe reaches back to corporate founding Nando Media and Associated Press April 7, 2003

HealthSouth's alleged scam was so meticulously conducted that the conspirators made sure to vary the already small fictitious entries at different hospitals in a further attempt to avoid suspicion, the SEC complaint alleges.

And there seems to have been more than a few conspirators. Starting in the 1980s, whenever HealthSouth profits fell short of what Wall Street expected, Chairman and Chief Executive Officer Richard M. Scrushy would tell accountants to "fix it," according to the complaint.
HealthSouth talent is said to be in its sleight of hand The Baltimore Sun April 13, 2003

In essence the accounting fraud resulted in a massive overstatement of profits to banks, to the SEC and to the market. The consequence was that the company appeared to have far more money and much larger assets than it actually had.

to contents

Hiding the Fraud

Mr. Owens, in his plea agreement with the government, said Mr. Scrushy told him in 1997 "to continue falsifying HealthSouth's books and records because [Mr. Scrushy] was planning on selling stock and he wanted to maintain the stock's current level."
HealthSouth Tape Reflects Doubt The Wall Street Journal April 15, 2003

HEALTHSOUTH also announced today that it expected to report a one-time charge, net of tax, of approximately $310 million in the fourth quarter of 1998. This charge, most of which will be non-cash, relates to the value of certain assets obtained through the Company's major acquisitions.
HEALTHSOUTH Announces $1 Billion Stock Repurchase Program And One-Time Charge In Fourth Quarter, PR Newswire February 8, 1999

The company's dramatic 86% decline in net income resulted largely from a charge because it discontinued its home health business after profitability fell in the wake of the interim payment system.
Portrait of an industry in turmoil ; Survey paints picture of doom and gloom for many post-acute-care companies, Modern Healthcare December 20, 1999

According to the allegations made to date the company sought to hide and defray the excess profits in a number of ways. To hide the discrepancies HealthSouth paid US $300 million tax on its US $2,5 billion overstated profits even though it had to borrow the money to do so. It tried to reduce some of the money which was not there by write downs during takeovers. The SEC also claims that it declared larger losses than it actually incurred in 1998 when Medicare changes impacted adversely on the industry as a whole. It repeated this exercise in August 2002 claiming that it had only recently realised the impact of relatively minor Medicare changes.

Ken Livesay, HealthSouth's former assistant controller, told the Justice Department last month it sometimes had to borrow money to pay its tax bills.
Corporate black cloud descends on the IRS. Financial Times May 3, 2003

"There is a credibility problem," said Phillip Seligman, an analyst at Standard & Poor's, the corporate credit-rating service. "People are paying a lot more attention to credibility because of the scandals that occurred in other companies."
Echoing a similar announcement in 1998, HealthSouth last month switched its earnings forecast from rosy to problematical and said the darkened prospects were a result of a Medicare payment policy that it said had caught it by surprise. Skeptical investors drove HealthSouth stock to a series of 52-week lows.
Growing Concerns on the Health of HealthSouth, New York Times September 19, 2002

In 1997, - - - Mr. Scrushy expressed nothing but confidence. Wall Street analysts were led to believe that new Medicare rules would have virtually no impact on the company's profits, according to a shareholders' lawsuit filed in 1998.

The stock reached what would be its high - almost $31 - in April 1998, and Mr. Scrushy boasted that HealthSouth had achieved its 47th consecutive quarter of matching or beating earnings estimates.

But on Sept. 30, 1998, after Mr. Scrushy and other senior executives had sold millions of dollars in HealthSouth stock, the company made a startling announcement: it was likely to miss the analysts' estimates for 1998 and 1999. The stock lost more than half of its value in less than a month, dropping to $7.69 from $18.38 a few days before the
A far different picture of HealthSouth executive behavior comes from Ms. Landry, the former employee. She said the executives were laughing at shareholders in 1998 after the stock's drop. She knew this, she said, because she had a relationship with Patrick A. Foster, one of the executives.
But Mr. Scrushy's sale of stock, in May and at the end of July
(2002), raised fresh concerns about insider trading.
The Scrushy Mix: Strict and So Lenient The New York Times April 20, 2003

The company faces lawsuits in Delaware and in Jefferson County Circuit Court, and at least 17 investor lawsuits in U.S. District Court in Birmingham seeking monetary damages for stockholders.
Healthsouth CEO, CFO Placed on Leave, Reuters 20 Mar 2003

The government charged that HealthSouth's August warning about the Medicare change really was a Scrushy-approved "scheme" to lower analysts' expectations.
Alabama-based HealthSouth accused in $1.4 billion fraud, Associated Press 20 Mar 2003

Highly suspicious after the Enron and Dotcom collapses the market did not buy the attempts HealthSouth was making to get money off its books. The share price plunged dramatically. Stockholders commenced multiple class actions. The company tried to hide the fraud by splitting the company and taking half private. Shareholders were hostile to this and the plan was abandoned. The suspicions of regulators were aroused and the investigation which exposed the accounting fraud followed.

Also in June, we announced a proposed plan to divide our operations into separate inpatient and outpatient companies, and we continue to make good progress toward completing that plan during the second half of 1999.
HEALTHSOUTH Reports Second Quarter EPS of $.27 PR Newswire August 3, 1999, Tuesday

On Aug. 27, he (Scrushy) stepped down as chief executive of HealthSouth while remaining as chairman. He also announced plans to split off the company's surgical centers, which have been a major source of profit and growth, and said he would be chief executive of the new company. Bond analysts said HealthSouth's creditors might try to block the spinoff if they determined it could undermine the value of the company's bonds.
Growing Concerns on the Health of HealthSouth, New York Times September 19, 2002

It also said it had named a new independent member to its board and had appointed a special litigation committee to review matters related to claims against the company.
The announcement also said Scrushy would be replaced as chief executive by president Bill Owens, but would continue as chairman of HealthSouth and a new surgery center company being spun off by the firm.
"We have a strong company in sound financial condition, and we are confident that the results of the steps we have outlined today will demonstrate our commitment to acting in the best interests of our stockholders," he (Scrushy) said.
The company also announced that HealthSouth director Larry Striplin Jr. and Hanson will serve on the special litigation committee.

HealthSouth Says SEC Probing Company AP - Aug 19, 2002

"Based on comments we have received from some of our investors and lenders and conditions in the debt and equity markets, we have determined that it does not make economic sense at this time to proceed with a separation transaction," said Richard M. Scrushy, HEALTHSOUTH's Chairman of the Board.
HealthSouth Suspends Surgery Division Transaction from company www site16 Oct 2002

The S.E.C., in the case it filed last week, said that the controversy over the Medicare rule was simply a ruse and that Mr. Scrushy, along with several other HealthSouth executives, had been inflating and distorting the company's financial results almost since its inception.
After years of falsifying earnings, Mr. Scrushy had been looking for a way to reduce Wall Street expectations so he would not have to inflate profits as much in the future, the regulators said.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 22 2003

An assistant vice president for finance, Kelly Coleman, also testified that she heard in a meeting last summer that Scrushy had backed a plan to end the fraud by engineering a corporate spinoff, selling assets, and blaming a Medicare reimbursement change. Afterward she said the rest of the company would be private.

Fifth HealthSouth CFO pleads guilty

In August 2002, the Journal said court documents show, Scrushy invited a UBS banker to present to the board an analysis of a plan to ``spin or split'' the surgery division of the company.

The Journal said the plan, which was later expanded to include a possible sale of diagnostic facilities, might have helped the company avoid disclosing the alleged accounting fraud if it had been carried out.
Records Show UBS, HealthSouth Ties REUTERS May 14, 2003

And just weeks before an SEC investigation into HealthSouth became public, in September 2002, several UBS bankers presented a plan called "Project Crimson," which called for breaking up the company and selling off divisions. If successful, the plan might have helped HealthSouth avoid disclosure of the alleged accounting fraud.
UBS Helped Set HealthSouth Moves Leading to Scandal Yahoo! News May 14, 2003

It was "a very ballsy coverup of a very naked fraud," one former employee concluded. "Splitting the company up would make it more difficult to trace the earnings fraud."
HealthSouth's Scuttled Spinoff Draws New Scrutiny - April 7, 2003

HealthSouth seems to have had the plan to split the company in two and so hide its fraud for a long time. Plans to split the company were first proposed in 1992 after a large merger fell through after due diligence by the proposed acquisition. The reasons that this fell through were never disclosed but there is now a possibility that they scented the fraud and HealthSouth became scared.

In 1992, Scrushy declared that HealthSouth had grown so much since going public that it was "absolutely necessary" to restructure. So he laid out a plan to divide HealthSouth into three pieces each with its own president and CFO through an informal division that left the parent company intact.

Since then, some people have started to question the company's early restructuring. After all, Scrushy was fretting over HealthSouth's growth less than a month after failing to pull off a high-profile merger that would have made the company even larger than it already was. And neither HealthSouth nor its larger suitor the former Continental Medical ever gave the market a real reason for calling off the merger after performing months of due diligence.
But a federal investigation, accusing HealthSouth of accounting games that date back more than a decade, has certainly raised some suspicions.
That's the same year (1999) HealthSouth rolled out a second restructuring plan, this one an official spinoff intended to split inpatient and outpatient services and reignite the old fire beneath HealthSouth's stock.
HealthSouth's Scuttled Spinoff Draws New Scrutiny - April 7, 2003

There are claims that at various times staff did become alarmed and attempted to pressure Scrushy into abandoning the fraud.

The newspaper also reported, citing unnamed sources, that Leif Murphy, a former company treasurer, made a July 1999 presentation to former HealthSouth Chairman and Chief Executive Richard Scrushy that showed the company's profits were overstated.

Murphy demanded that Scrushy immediately correct HealthSouth's financial statements, but Scrushy refused, sources told The Journal. Soon after the incident, Murphy left HealthSouth.
HealthSouth seeks to raise capital MSNBC July 3, 2003 <>

In 1999, after the 1998 scare there were more proposals to split the company into two. These languished but were revived in the turmoil of 2002 with a plan to split the company into in-patient rehabilitation and a more profitable outpatient surgery and rehabilitation group.

One employee suggested that Scrushy would become chairman of the latter, and Owen of the former. The in-patient company would become a private company in which the fraud could be hidden.

The market refused to go along with these strategies and HealthSouth was forced to abandon them. Shareholders met and put the issues forcefully to Scrushy. It is reported that he "handled the complaints with aplomb"

Late last year (ie 2002) Providence Capital, a New York investment group led by Herbert Denton, began to circle the company. It bought a stake in HealthSouth when the shares were about $4, then began to sound out other shareholders about making changes.

In the post-Enron atmosphere, Mr Denton quickly found support. Some 50 shareholder representatives turned up at Providence's offices in Manhattan's 5th Avenue. Another 100 or so fund managers and assorted shareholders thought the company needed to be remodelled and dialled into the conference call. Providence says about 40 per cent of the shares were represented.

Mr Scrushy was also on the telephone, listening to a brewing rebellion focused on the number of his long-time acquaintances on HealthSouth's board. He had to sit through a litany of allegations and repeated accounts of bad governance and ill-treatment of shareholders. Providence set out numerous transactions between HealthSouth and companies in which it held an interest; dealings between independent directors and the company; company loans to executives; repriced stock options; a prior Medicare probe settlement with the Department of Justice; profit warnings; executive share sales; and a host of one-off charges against earnings.
Diagnosis of fraud. Financial Times April 15, 2003

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Unmasking the fraud

Sarbanes-Oxley had increased the penalties for white-collar crime from five years to, in some instances, 20 years. Alice Martin, the US attorney running the Justice Department's case in Birmingham, says: "We've had witnesses say that Sarbanes-Oxley was discussed among the accounting people.
According to prosecutors, people had started to come forward at the start of the year, complaining of pressure and of not wanting to commit perjury before a grand jury looking at alleged wrongdoing in the company.
Diagnosis of fraud. Financial Times April 15, 2003

There is little doubt that the Sarbanes-Oxley Act, passed by Congress last year in the wake of the Enron and other corporate scandals, is allowing investigators to wrap up cases faster.

HealthSouth employees have been the first to be charged with falsely certifying the accuracy of their accounts with the SEC, one widely-publicised Sarbanes-Oxley measure. Also, the increase in penalties for white-collar crime has widened considerably the jail time that might be served between people who co-operate with prosecutors and those that do not.
Sarbanes-Oxley speeds HealthSouth Financial Times March 30, 2003

The new Sarbanes-Oxley Act, passed after the Enron and Worldcom scandals gave the government greater powers and imposed long prison sentences. This put considerable pressure on HealthSouth staff to roll over in return for a lesser sentence.

Scrushy "agreed to and helped devise a plan to offer [a] senior officer who had balked at signing the Form 10-Q the position of CFO of the company that was to be spun off from HealthSouth and which was believed 'clean' -- that is, which was largely unaffected by fraudulent entries -- and promise the senior officer that they would 'not play games anymore' to induce the senior officer to sign the form," last week's affidavit states.

That senior officer, who appears to be former CFO Weston Smith, would soon become the first HealthSouth insider to plead guilty to fraud charges and turn against the company's founder.
Scrushy's Prognosis Looking Worse Than HealthSouth's. (Melissa Davis) November 10, 2003

The F.B.I., which filed a criminal complaint on Wednesday against Weston Smith, HealthSouth's chief financial officer, disclosed last month that it was investigating possible securities law violations.
The Rise and Fall of Richard Scrushy, Entrepreneur, New York Times March 21, 2003

- - - - former chief financial officer Weston L. Smith approached prosecutors this year and offered to make audiotapes of his colleagues, according to sources familiar with the case.
In the HealthSouth case, Smith's cooperation helped prosecutors paint a detailed picture of the alleged scheme and participants, perhaps causing others to figure that their best chance was to plead guilty, lawyers said.
High-Speed Justice in Fraud Cases Washington Post 4 April 2003

In February 2003 the FBI and SEC moved to examine documents and question employees. On 19th March they raided the company's headquarters and commenced civil actions against HealthSouth and Scrushy, followed soon after by an action against Scrushy alleging insider trading. Trading In HealthSouth shares on the stock exchange were suspended then discontinued.

U.S. authorities charged HealthSouth Corp., a top health services company, and its chief executive on Wednesday with overstating profits by $1.4 billion in "a massive accounting fraud" that prompted a night raid of the company's headquarters by the FBI. - - - - - SEC Enforcement Director Stephen Cutler accused the company of "an appalling betrayal of investors." - - - - - the Justice Department said. "Additional criminal charges are expected."
The SEC said the earnings overstatement occurred because HealthSouth CEO Richard Scrushy insisted that the company meet or exceed earnings expectations established by Wall Street.
It said managers would present actual quarterly results to Scrushy. If they fell short of Wall Street's targets, "Scrushy would tell HRC's management to 'fix it' by recording false earnings on HRC's accounting records," the SEC said.
The SEC's complaint alleged HealthSouth officers tried to persuade Scrushy to halt the book-cooking. But the SEC said, "In the fall of 1997, when HRC's accounting personnel advised Scrushy to abandon the earnings manipulation scheme, Scrushy refused, stating in substance, 'not until I sell my stock."'
Healthsouth, CEO Face Fraud Charges, Reuters 19 Mar 2003

The NYSE said trading "may or may not resume." The company has already been removed from the S&P 500 index.
Healthsouth Risks NYSE Delisting Reuters 21 Mar 2003

The Justice Department indicated that a criminal charge against Scrushy would follow. He denied any involvement. Scrushy was put on leave by HealthSouth and then fired.

The case was accelerated when two senior staff agreed to wear tape recorders and record their colleagues. By early May eleven past and present staff including all 5 of the company's Chief Financial Officers had pleaded guilty to criminal conduct. The details of the alleged fraud unfolded further. There is a 5 year statute of limitations for most of the fraud charges. The first CFO, cofounder Aaron Beam is therefore charged with bank fraud which has a 10 year limitation. In July Jason Brown, a treasury official at HealthSouth also pleaded guilty and offered to assist the inquiry.

The SEC tried unsuccessfully to obtain a court order to freeze Scrushy's assets and in doing so more details of the alleged fraud emerged.

According to documents filed in the accounting case, the HealthSouth accounting fraud largely involved manipulation of what is known as contractual adjustment - the difference between gross charges to patients and the amount that a company expects to be reimbursed by insurers. Accounting principles generally require any increase in revenue or reduction in expenses to be matched with an increase in assets or a reduction in liabilities. As a result, the manipulation of the contractual adjustments resulted in huge - and artificial - increases in the company's assets, according to court documents.
Looking for Medicare Fraud at HealthSouth New York Times March 28, 2003

Edwards said she would hide expenses in various accounts at the urging of superiors. At one point, she said, the debits totaled around $80 million. She also admitted to creating codes to deceive auditors and falsified invoices to cover her tracks.

Morgan, Ayers and Valentine made similar illegal entries into other areas of HealthSouth's books, prosecutors said.
Former HealthSouth CEO charged with insider trading The Associated Press April 4, 2003

Count 1 of the information alleges that a conspiracy existed from at least as early as 1997 until he left HealthSouth's employment, between Martin and senior officers, to devise a scheme to artificially inflate HealthSouth's publicly reported earnings and falsify reports of HealthSouth's financial condition. Martin, as CFO, William T. Owens, who was then controller of HealthSouth, and others would provide the chief executive officer with monthly and quarterly preliminary reports showing HealthSouth's actual financial results. After reviewing these reports, the CEO
(ie Scrushy) would direct Martin and Owens to find ways to ensure that HealthSouth's "earnings per share" number met or exceeded Wall Street analyst expectations. These instructions were passed on to members of HealthSouth's accounting staff.

After the senior officers issued instructions as to the desired earnings per share number, HealthSouth's accounting staff would meet to discuss ways to artificially inflate HealthSouth's earnings to meet the CEO's desired earnings numbers. These meetings were known as "family" meetings, and the attendees were known as the "family." At the meetings, they would discuss ways by which members of the accounting staff would falsify HealthSouth's books to fill the "gap" or "hole" and meet desired earnings. The fraudulent postings used to fill the "hole" were referred to as the "dirt."
Methods included manipulating the "contractual adjustment" or other expense accounts to artificially inflate revenue on the income statement; and making false and fraudulent entries into accounts on the balance sheet concerning Property, Plant and Equipment (PP&E), cash, inventory and intangible asset or goodwill. HealthSouth's accounting personnel designed the fictitious accounting entries to avoid detection.
It was further part of the conspiracy that Martin, the senior officers and others caused HealthSouth to file publicly with the SEC annual reports and quarterly reports that materially misstated HealthSouth's net income, revenue, earnings per share, assets and liabilities during the period of Martin's involvement in the conspiracy.


Invoices received by the company typically are entered into an advanced software system that conducts a "computer audit." The system also creates reports as it generates checks, said Barbara Patton, who manages HealthSouth's accounts payable department.

Patton said participants in the fraud waited until monthly operating reports were completed by the computer, which allowed them to sidestep the system's checks and balances.

After the reports were completed, the participants typed in false information elsewhere in the computer system that was later merged into consolidated corporate statements.

"It's real easy," said Patton, who designed her department's systems of checks and balances but said she was unaware of how the fraud was accomplished until she read media accounts.

Accountant details simple techniques used in HealthSouth fraud Nando Times (Associated Press) April 22, 2003

Beam, an original founder of HealthSouth, served as HealthSouth's chief financial officer from the company's creation in 1984 until October 1997. The criminal information alleges that from about April 1996 to October 1997, Beam and others, including HealthSouth's chief executive officer at the time, devised a scheme to obtain loans and credit from Birmingham-based AmSouth Bank by filing false and fraudulent financial information with the bank.
The information states that in April 1996, HealthSouth entered into a restated credit agreement with a syndicate of 32 lenders from around the world, including AmSouth Bank. The lenders extended a line of credit totaling $1.25 billion to HealthSouth

A treasury official at HealthSouth Corp., Birmingham, Ala., agreed to plead guilty to falsifying financial records, as federal prosecutors continued investigating alleged accounting fraud at the rehabilitation company. Jason Brown, 34, also agreed to cooperate with all investigations of the company, including one by the Securities and Exchange Commission, court records show. Prosecutors allege that Brown manipulated records to improve same-facility outpatient volume figures reported for HealthSouth's 2002 third quarter and that he falsified records regarding a $27 million stock sale to make it appear as if the sale took place in 2002, instead of 2001.
12th guilty plea in HealthSouth fraud probe Modern Healthcare July 9, 2003

In March, the Securities and Exchange Commission charged Scrushy with illegal trading on inside information, but the former CEO has been fighting those charges aggressively.

Scrushy spent the month of April in court battling an SEC attempt to freeze his assets. In May, U.S. District Judge Inge Johnson ruled in Scrushy's favor, allowing him access to his estimated fortune of more than $175 million.
HealthSouth workers asked to come forward USA TODAY Jul 31, 2003

A U.S. congressional panel, the House Energy and Commerce Committee also commenced an investigation in May 2003. Its interest extended wide of the accounting fraud and included Medicare fraud, corporate governance, the relationships between directors and companies, as well as the role of auditors, tax accountants, investment banks and analysts, who would be expected to detect and expose the fraud. Scrushy offered to give evidence to the committee in return for immunity but his offer was refused. Instead documents were subpoenaed. A fuller account of the congressional inquiry is on another web page.

The House Energy and Commerce Committee has launched an investigation into the financial fraud at HealthSouth, asking the company and its auditor, Ernst & Young, to provide detailed documentation of their actions surrounding the hospital chain's $2.5 billion overstatement of earnings. - - - - likely to result in hearings featuring nervous executives from HealthSouth and Ernst & Young
House joins Justice, SEC in HealthSouth scrutiny USA Today April 23, 2003

Although Mr. Scrushy's attorney initially stated that his client had no knowledge of the alleged fraud and was as shocked as anyone, the possibility that this is true is, as we all know, rather remote.
Heading South: The Burglar of Birmingham Jenks Healthcare Business Report April 2003

A lawyer for ousted HealthSouth Corp. Chief Executive Richard Scrushy has offered to have his client testify before Congress about the scandal-plagued company he founded, as long as Scrushy receives immunity.

Congress last week demanded Scrushy turn over by June 25 any records he might possess on the personnel, finances and accounting of HealthSouth, an operator of physical therapy and surgery centers that faces the prospect of bankruptcy

Ousted HealthSouth CEO Offers Testimony for Immunity Reuters June 18, 2003
A congressional committee threatened on Thursday to subpoena former HealthSouth Corp. HLSH.PK Chief Executive Richard Scrushy if he does not turn over all the documents it requested in a probe of the company.
"They did provide us with some documents, but they did not fully comply with the committee's request," committee spokesman Ken Johnson said. "We've made clear that they must turn over everything or run the risk of a subpoena."
Congress brandishes subpoena at HealthSouth ex-CEO Reuters June 26, 2003

Scrushy has been called to testify before the House Energy and Commerce Committee, and he offered to testify in exchange for immunity. Congress rejected that offer June 18, reiterating that Scrushy turn over any records pertaining to the company's personnel, finances and accounting.

"We're not going to provide him with any sweetheart deals," a committee spokesman told the Chicago Tribune.

Ex-CEO Denied Immunity in HealthSouth Case
Medical Newswire July 3, 2003

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Progress of the investigation

The undisputed extent of the fraud at HealthSouth and the claims of its many ramifications must be set against the lenient fines, lenient sentences and relative lack of court convictions that followed. The extent and nature of the fraud was not disputed by anyone and 15 senior staff pleaded guilty and assisted the inquiry. The only issue was culpability. Only one of the major participants was convicted by a jury. Richard Scrushy strenuously denied involvement claiming he was duped. He was acquitted by the jury in 2005. Either the real conspirators escaped with remarkably lenient sentences considering their dishonesty or Scrushy duped the jury in his trial. These issues are addressed on other pages. Somehow the justice system failed miserably.

It is interesting that little was written about this failure to extract penalties that matched the criminality. It must be noted that the state did not appeal Scrushy's acquittal, so could not have been as confident as they seemed.

The federal government's investigation into massive accounting fraud at HealthSouth Corp. has expanded to include obstruction of justice, witness intimidation, money laundering and public corruption, according to court papers filed in Birmingham's federal court.
Witness intimidation, obstruction of justice, perjury claimed in filings Birmingham News July 24, 2003

The federal probe into fraud at HealthSouth Corp. (HLSH.PK) has spread more deeply into the health services provider's taxes, and the Internal Revenue Service is now involved, The Wall Street Journal reported on Thursday.
IRS Now Involved in Healthsouth Probe - WSJ New York Times (REUTERS) July 31, 2003

"Today's charges show this fraud was not isolated in the accounting department of HealthSouth Corporation. This is not a mere 'accounting fraud,' but rather a business scheme to fraudulently boost HealthSouth's reported earnings," stated U.S. Attorney Alice Martin. "The actions of both of these defendants helped conceal the scheme to fraudulently inflate earnings from the investing public, the auditors and government regulators."  
2 at HealthSouth to plead guilty : Latest plea deals in fraud case show inquiry widening Press Release WWW.USDOJ.GOV JULY 31, 2003

In a filing in U.S. District Court in Birmingham, Ala., on July 9, prosecutors in the HealthSouth case asked Judge Inge Johnson to delay the sentencing of several former HealthSouth executives who had pleaded guilty to fraud, saying the investigation "has developed and expanded" to include "public corruption" and other alleged crimes. "The United States has uncovered evidence indicating multiple crimes by multiple suspects," prosecutors wrote. Details of the additional evidence and public-corruption allegations weren't divulged in the filing. 
 Federal investigators, former executives and HealthSouth's new management now maintain that accounting fraud at HealthSouth totaled at least $3 billion over a number of years.
HealthSouth investigation widens Wall Street Journal Aug 22, 2003

When he pleaded guilty last May, Michael D. Martin, one of the former HealthSouth chief financial officers, said under oath that "virtually every month," Mr. Scrushy had directed him "to inflate the numbers" so the company would meet the expectations of Wall Street.
HealthSouth Scandal Doesn't Slow Former Chief The New York Times September 26, 2003

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The extent of the fraud

Prosecutors restricted their charges to US $2.7 billion and the years subsequent to 1996/7 but acknowledged it went back much further, even to 1984. The company's own estimates were in the region of US $4 billion.

Officials for Alvarez & Marsal, restructuring specialists hired to turn around the scandal-ridden operator of rehabilitation and surgical centers, said at a financial update meeting in New York that the total amount of fraudulent entries in HealthSouth's accounting ledgers totaled between $3.8 billion and $4.6 billion.
HealthSouth Fraud Larger Than Estimate Reuters January 20, 2004

The fraud included $2.5 billion in fraudulent accounting entries from 1996 to 2002, $500 million in incorrect accounting for goodwill and other items involved in acquisitions from 1994 to 1999, and $800 million to $1.6 billion in "aggressive accounting" from 1992 to March 2003, said Bryan P. Marsal, the company's chief restructuring officer.
HealthSouth Audit Finds as Much as $4.6 Billion in Fraud The New York Times January 21, 2004

 "When ... was the first conversation you had with Mr. Scrushy about this fraud?" (Judge) Bowdre asked.

"The very first conversation was in, I believe it was early 1988, probably February, February or March of 1988," said the former finance chief, among 15 one-time HealthSouth executives who pleaded guilty and agreed to help prosecutors.
"We chose to cut it off at '96 because at some point in time we don't want to go back I mean, there is one thing if we go back to '84 from out of the balancing charge, we specifically choose that time period because we had the most records available," he (Richard Smith prosecutor) said.
Transcripts Show Allegations of Fraud at HealthSouth May Be Traced Back to Late 1980s ABC News (Associated Press} Apr. 24, 2005

 Forensic accountants working for HealthSouth's new management put the extent of the fraud at nearly $4 billion.
Former HealthSouth exec gets year and day in jail Reuters December 21, 2005

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The accounting fraud opened the door to a flood of lawsuits including separate fraud and bribery suits against Scrushy, prison sentences and fines for the staff involved and a myriad lawsuits involving HealthSouth itself. HealthSouth faced almost certain bankruptcy but somehow survived.


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This page created July 2003 by
Michael Wynne
Revised and Updated October 2007