Thievery, again

April 14, 2003

ON THE FACE of it, HealthSouth Corp. was a huge success, 1,700 medical facilities assembled by its flamboyant chairman, a former respiratory therapist, into the nation's largest chain of outpatient surgery, diagnostic and rehabilitative services.

With headquarters in Birmingham, Ala., the Fortune 500 firm had become a brand name in sports medicine and the linchpin of the Southern city's aspirations for a high-tech future - building there, for example, the world's first all-digital hospital.

Trouble is, HealthSouth's finances were an outright fraud, the Securities and Exchange Commission charged in a civil suit last month, the product of a deeply ingrained conspiracy among its top officers to falsely inflate its earnings to keep up with Wall Street's expectations.

If this sounds familiar - an echo of Enron and WorldCom - you're right. If you somehow thought the war on corporate corruption had been won since then, think again.

The good news is the actions against HealthSouth founder Richard M. Scrushy and other officers began with the first SEC lawsuit brought with new powers from last year's Sarbanes-Oxley financial reform act. It's touted as a model for more crackdowns.

The agency also just approved important new rules to make sure corporate audit committees are independent enough to resist management pressures to cheat, and the Senate last week passed a bill making it easier for the SEC to go after wrongdoers.

But the bad news is the HealthSouth saga shows victory remains elusive in the war on corporate abuses: New powers and rules can't completely stop blatant thievery.

That was the case at HealthSouth, the SEC says, with the firm overstating its earnings for years. From 1997 to 2002, the overstatements totaled $2.5 billion, the government says. On one SEC filing, the firm allegedly misstated earnings by 4,722 percent.

This wasn't accidental, the SEC says: Mr. Scrushy met quarterly with officers - they called themselves "family members" - to calculate how much "dirt" (fake earnings) to put into the "hole" (the gap between real earnings and the Street's targets). Of course, there were cheers from analysts and the imprimatur of a top accounting firm.

Meanwhile, Mr. Scrushy made out like a bandit, reportedly getting paid $55 million from 1994 to 2001 and selling HealthSouth stock worth $170 million in the last decade.

Mr. Scrushy, his assets now frozen, has been fired by HealthSouth. Some other officers, already pleading guilty to charges, are cooperating in his criminal investigation. HealthSouth has been delisted by the New York Stock Exchange; shareholders, their stock nearly worthless, are suing; the company is facing bankruptcy; and construction of that digital hospital has stopped. And long-suffering Birmingham, where Mr. Scrushy had become a civic and charitable force and his name is plastered just about everywhere, is beside itself.

Give the SEC credit for using its new powers to go after HealthSouth and Mr. Scrushy - and for the new rules promoting audit committee independence. Such powers and actions should lessen the possibilities of more Enrons. But if the SEC is right about HealthSouth, thievery is still very much alive and active in corporate America - thievery that laws can't entirely deter.

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