HealthSouth talent is said to be in its sleight of hand

April 13, 2003|By JAY HANCOCK

HEALTHSOUTH Corp., launched on its bell-shaped trajectory with Baltimore money in 1984, is a fraud of a different form, if we can believe U.S. regulators.

WorldCom was the Mark Rothko of financial artifice, creating billions in fake profits with what prosecutors say were broad, bold strokes. Enron was Jackson Pollock, deriving illusory riches from an arrogant, colorful riot of lies.

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.

While WorldCom was heaving entries from its expense column onto its balance sheet in billion-dollar chunks, while Enron sprouted fraud at multiple, apparently unorchestrated levels, HealthSouth employees carefully altered invoices, painstakingly covered their tracks on the asset ledger and made sure to keep the fiddles too small to attract auditors' scrutiny, the government alleges.

A national chain of rehabilitation hospitals and outpatient centers, HealthSouth started almost two decades ago with venture capital from New Enterprise Associates of Baltimore. New Enterprise co-founder Charles W. "Chuck" Newhall III, a major figure in the venture trade, has served on HealthSouth's board ever since.

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.

Those in on the deceit referred to themselves as "family" and to book-cooking confabs as "family meetings," says the government.

Family members are trying to cop pleas so fast the court can't keep up. Eight former HealthSouth employees have pleaded guilty to charges relating to the misstatements. A ninth, former Chief Financial Officer Michael D. Martin, tried to do the same last week, but U.S. District Judge U. W. Clemon in Birmingham, Ala., told him to wait in line.

Scrushy (pronounced SCROO-shee) has denied wrongdoing.

Alleged fraud of this size always raises questions about what the heck the board was doing while the books baked. HealthSouth stock has fallen from more than $30 in 1998 to pennies, and investors are furious at Newhall and other longtime directors for not detecting the chicanery.

The disciplined nature of the supposed deceit suggests it would have been difficult to sniff out. Newhall, who declined to comment, is not on HealthSouth's audit committee, which bore primary board responsibility for account accuracy.

Even so, Newhall and the other directors oversaw the company, and the supposed fraud on their watch was enormous.

The $1.4 billion in bogus profits alleged in the SEC complaint came only in 1999 onward. In a separate document, the government says HealthSouth inflated earnings by an additional $1.1 billion in 1997 and 1998, and the SEC says fraud had been going on since "shortly after" HealthSouth went public in 1986.

Wall Street sources familiar with HealthSouth say the government is also likely to examine the relationship between HealthSouth and MedCenterDirect.com, a start-up financed by New Enterprise Associates, which invested $12 million in 2000.

In 2001, HealthSouth bought $100 million in supplies through MedCenterDirect, whose investors also included HealthSouth directors and executives, according to government filings.

Richard P. Wessel, district administrator in the SEC's Atlanta office, which is handling the HealthSouth investigation, declined to comment on whether his office is examining MedCenterDirect.

None of this is likely to hurt New Enterprise very badly. The firm, an important funnel of capital into Maryland, has more than $5 billion in investments. It sold its HealthSouth stock years ago.

The bigger issues for New Enterprise, which did more deals than any other U.S. venture firm last year, have to do with evolving health care and telecom regulation and how soon the biotech and computer sectors revive. But HealthSouth will distract.

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