Company Raided on Fraud Charges

U.S. authorities charged HealthSouth Corp. and its chief executive Wednesday with overstating profit by $1.4 billion in “a massive accounting fraud” that prompted a night raid of the company’s headquarters by the FBI.

The Securities and Exchange Commission suspended New York Stock Exchange trading in HealthSouth securities for two business days as SEC Enforcement Director Stephen Cutler accused the company of “an appalling betrayal of investors.”

Adding another chapter to the market’s ongoing corporate scandal saga, the Justice Department said HealthSouth’s former chief financial officer agreed to plead guilty to criminal fraud charges and cooperate with the government.

The Birmingham, Ala.-based company did not return telephone calls for comment on the SEC and Justice Department charges.

The company said it was cooperating with authorities.

HealthSouth is the nation’s largest provider of outpatient surgery, diagnostic and rehabilitative health-care services. It operates 1,700 facilities in the United States, Britain, Australia, Canada, Puerto Rico and Saudi Arabia.

In a civil complaint filed in U.S. District Court in Birmingham, the SEC said, “Since 1999, HealthSouth ... has overstated its earnings by at least $1.4 billion” and that by the third quarter of 2002, its assets, too, “were overstated by at least $800 million, or approximately 10%.”

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.

The SEC alleged that HealthSouth began improperly padding its profit shortly after going public in 1986.

It said managers would present actual quarterly results to Scrushy.

If they fell short of Wall Street’s targets, “Scrushy would tell [HealthSouth’s] management to ‘fix it’ by recording false earnings on [HealthSouth’s] accounting records,” the SEC said.