In Focus
March 21, 2003
ealthSouth's "Mr. Fix It", founder and CEO Richard Scrushy, now has a lot to fix. The SEC accuses him and HealthSouth of a "massive accounting fraud", and an "appalling betrayal of investors".
In what are the first charges to be filed under the new Sarbanes-Oxley law requiring corporate executives to certify company financial statements, this fraud ranks up there with the likes of Enron and WorldCom, according to the SEC. Although certifying financial statement accuracy, for years Scrushy and his band of co-conspirators (called "family members") conspired to grossly inflate earnings to meet Wall Street expectations. Since 1999, the SEC alleges that earnings have been overstated by $1.4 billion.
The SEC alleges that manipulation of earnings was "standard operating procedure" at the company. It is reported that, even when "family members" pleaded with Scrushy to stop demanding that earnings be "fixed", he refused, saying he would not advocate company honesty until after he had sold his own company stock. Indeed, during the period of the fraud, Scrushy sold 7 million shares, reaping approximately $77 million in stock sale gains. And in 2002 he profited by $100 million by selling stock options.
Healthsouth's CFO already has agreed to plead guilty and to cooperate with the SEC's investigation. Additional criminal prosecutions surely will follow.
But who else may regulators - and aggrieved investors - look to as having something to "fix"? Apart from company employees, four potential players come to mind. First, the officers and directors of HealthSouth. Second, members of HealthSouth's auditing committee. Third, the outside auditing firm, Ernst & Young (though the SEC complaint alleges some attempt by HealthSouth to create false ledgers and other documents to cover their tracks). Finally, and most intriguing, the law firm of Fulbright & Jaworski.
Here is what the New York Times says of Fulbright & Jaworski's involvement with HealthSouth: "In a report commissioned by HealthSouth last year, the Washington law firm of Fulbright & Jaworski cleared company officials of selling stock shortly before a company announcement that pushed down the stock price, according to HealthSouth."
No doubt ensuing litigation will explore the roles of these and others involved with HealthSouth and Scrushy.
— James J. Eccleston
FinancialCounsel.com
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