HealthSouth Says Fraud Is Greater Than Expected

From Reuters

HealthSouth Corp. said Tuesday that its accounting fraud was much larger than earlier estimates and might have exceeded $4 billion.

Executives for Alvarez & Marsal, a restructuring firm hired to turn around the scandal-ridden operator of rehabilitation and surgical centers, said at a financial update meeting in New York that fraudulent entries in HealthSouth’s accounting ledgers totaled $3.8 billion to $4.6 billion.

In July, the company estimated that it would have to adjust its balance sheet downward by $2.5 billion.

HealthSouth said Tuesday that the company expected to generate revenue of nearly $4 billion in 2004, signaling a rebound from the scandal, which led to criminal charges against 16 former executives.


Alvarez & Marsal executives said HealthSouth would remain financially viable and healthy despite expenses and adjustments related to the scandal.

HealthSouth, based in Birmingham, Ala., expects $650 million in 2004 earnings before interest, taxes, depreciation and amortization, or EBITDA, one measure of a company’s profitability.

Federal accounting fraud allegations in March 2003 triggered an “adverse material change” clause that froze the company’s credit line and prevented HealthSouth from repaying a convertible bond that matured April 1, landing it in default.

HealthSouth said Friday that Credit Suisse First Boston arranged a $355-million loan that allowed the company to repay the defaulted bond.


HealthSouth’s presentation to investors is the first since July 7, when company executives said the company was likely to avoid a bankruptcy filing, calming investors after the company and its executives were accused of accounting fraud.

HealthSouth, its former bankers including investment bank UBS and its former auditor, Ernst & Young, face a class-action lawsuit from shareholders and bondholders.

HealthSouth’s stock and bonds have recovered their value in recent months. HealthSouth shares dropped 26 cents to $5.93 in over-the-counter trading Tuesday. That level is far above its price of 10 cents reached in late March.

HealthSouth is current on all of its payments under its borrowing agreements that cover more than $3 billion in debt.

Fifteen former executives have pleaded guilty to taking part in the fraud scheme, and HealthSouth founder Richard Scrushy is facing criminal charges in the case.

Alvarez & Marsal executives said HealthSouth was working with the U.S. Centers for Medicare and Medicaid Services and the Securities and Exchange Commission, which were investigating the fraud. The company hopes to reach a large settlement with the Medicare office covering all potential wrongdoing.

HealthSouth perpetrated its fraud essentially by inflating the amount it was receiving from the Medicare program for the elderly and disabled.