Guilty plea entered by 5 officers of HealthSouth

Scheme aimed to inflate earnings by billions

April 04, 2003|By BLOOMBERG NEWS

BIRMINGHAM, Ala. - Five HealthSouth Corp. officers pleaded guilty yesterday to conspiring to inflate company earnings by as much as $2.5 billion, an alleged fraud almost twice the size previously estimated by U.S. authorities.

Also yesterday, the Securities and Exchange Commission, which had accused fired chief executive Richard Scrushy and HealthSouth of inflating earnings by at least $1.4 billion, charged Scrushy with insider trading. The agency said it would seek up to $743 million in penalties, disgorgement of illegal profits and triple damages if it proved the new charges.

Those pleading guilty were Kenneth Livesay, 42, chief information officer; Rebecca Kay Morgan, 35, group vice president, accounting; Cathy Edwards, 39, vice president, asset management; Angela Ayers, 33, vice president, finance and accounting; and Virginia Valentine, 33, assistant vice president, finance and accounting. The SEC also sued the five for fraud.

"I participated in various activities that resulted in the production of financial statements that were false and misleading for HealthSouth Corp.," Livesay told U.S. District Judge U.W. Clemon, who accepted his plea. "I was able to keep my job. I was paid a nice salary. I got a bonus most every year. I also exercised HealthSouth stock options."

Admissions by the five bolster testimony of three other HealthSouth officials who have pleaded guilty to fraud in the probe of Scrushy.

All five executives pleaded guilty to conspiracy to commit wire fraud, securities fraud and filing false records, U.S. Attorney Alice Martin said. The five will cooperate with prosecutors investigating Scrushy and help HealthSouth, the largest U.S. operator of rehabilitation hospitals, with a forensic audit of its books, she said.

"These individuals trusted upper management, but they still participated in this fraud," Martin said. "What was driving the fraud from the top was clearly a desire to meet Wall Street's expectations and have the earnings per share that the analysts were projecting."

The four women joined the conspiracy as early as 1994; Livesay joined in 1996, the charges said. Livesay is charged with a separate count of filing false books and records. Edwards and Morgan were also charged with wire fraud. The five executives will be required to forfeit any gains from their fraud.

Ayers and Valentine admitted making false entries to contractual-allowance accounts. Morgan falsified cash accounts, and Edwards falsified asset accounts, according to court papers. Livesay conspired with senior officers to direct the accounting fraud between 1996 and 1999, the papers said.

The fraud detailed in the new charges extended back earlier than previously alleged by the other three executives, Martin said. The charges against Livesay, the former assistant controller, say that HealthSouth overstated pretax income by $635 million in 1998 and by $440 million in 1997, according to court papers. This adds $1.1 billion to the SEC's estimate, Martin said.

By 1998, the difference between HealthSouth's actual earnings and those reported to the SEC "had become very large and was growing larger," the papers said. HealthSouth's treasury employees described the situation as "one of burning through cash," and the company was forced to borrow money from banks to pay income taxes, the papers said.

The investigation of Scrushy and other HealthSouth executives began as an insider-trading probe last year and transformed into an accounting-fraud case last month, Martin said. The insider-trading case is "on the back burner" while prosecutors pursue accounting-fraud allegations, she said.

"We expect that additional criminal charges will be filed against finance employees who are currently cooperating" with prosecutors and have not been charged, Martin said in an interview.

Two former chief executive officers, Weston Smith and William Owens, pleaded guilty last month and implicated Scrushy in an accounting fraud dating back to 1986. Assistant controller Emery Harris also pleaded guilty. All three men are cooperating with Martin's office.

HealthSouth has hired lawyers and turnaround specialists to help the Birmingham-based company avert bankruptcy. The company defaulted on $367 million in bond and interest payments this week. The company said yesterday that it would fire 165 workers to cut costs to help avoid bankruptcy.

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