Judge Criticizes HealthSouth Probe

A federal judge criticized the government’s investigation of fraud allegations at HealthSouth Corp. as she gave ousted Chief Executive Richard M. Scrushy access to all his money and property.

In a 64-page ruling, U.S. District Judge Inge Johnson said the government had “undoubtedly manipulated simultaneous criminal and civil proceedings” in its probe of accounting practices at the medical services company.

Such actions, she wrote, could harm Scrushy because his lawyers were unable to get answers from former HealthSouth workers who repeatedly cited their constitutional right against self-incrimination in response to questions during a hearing.

Johnson said the Justice Department and FBI fed evidence from the criminal probe to the Securities and Exchange Commission for use in its civil lawsuit against HealthSouth and Scrushy.

Despite the intermingling, the judge said: “To date, the SEC has failed to establish, as opposed to allege, that defendant Scrushy was involved in the fraud.”

Johnson brought a halt to the SEC’s civil lawsuit pending the resolution of any criminal charges against Scrushy, who has yet to be charged.

SEC attorney Bill Hicks declined to immediately comment Thursday on the ruling, released late Wednesday.

U.S. Atty. Alice Martin, whose office is leading the criminal probe, denied there had been any manipulation. She said halting the civil suit would help the criminal investigation by letting it proceed “unimpeded.”

Defense lawyer Tom Sjoblom called Johnson’s decision a victory for Scrushy.

“She says in several places there was no evidence that he was involved,” said Sjoblom, a former SEC attorney. “She says there has just been a complete unfairness in the process.”

Although some of the executives who have pleaded guilty implicated Scrushy in court documents, Johnson called those allegations inadmissible hearsay.

In Washington, the House panel investigating the HealthSouth scandal expanded its probe and requested financial records from UBS Warburg, the company’s investment banking firm.

Senior lawmakers on the House Energy and Commerce Committee, in a letter to the Wall Street firm, said they were concerned about its earlier assessments of HealthSouth’s financial condition.

Despite HealthSouth’s disclosures last year of an SEC insider-trading and accounting investigation, UBS Warburg analyst Howard Capek continued to issue favorable ratings of the company’s stock and to encourage investors to buy it, the lawmakers told the firm.

UBS Warburg officials didn’t immediately return a telephone call seeking comment.