Deal Proposed in HealthSouth Case

Investors who sued over a huge fraud at HealthSouth Corp. would get $445 million in stock and cash under a proposed settlement that the rehabilitation chain said would resolve its thorniest legal problems stemming from the scheme.

The Birmingham-based company will pay $215 million in common stock and warrants under the global settlement proposal announced Thursday, and insurance companies will pay an additional $230 million in cash.

Stockholders and bondholders involved in class-action suits filed in federal court also will receive 25% of anything the company eventually gets in its lawsuit against fired Chief Executive Richard Scrushy, former auditor Ernst & Young and UBS, HealthSouth’s former investment bank.

The company said attorneys were working on a final version of the agreement, which must be approved by a judge.

HealthSouth did not admit any wrongdoing. Scrushy was acquitted of criminal charges in the fraud.

Current CEO Jay Grinney said the proposed settlement was “a major milestone in HealthSouth’s recovery and a powerful symbol of the progress we have made as a company.”

Gregory L. Doody, HealthSouth’s general counsel, said that, coupled with past agreements, the global settlement put most of the company’s legal issues behind it “and allows us to move forward.”

In a statement, plaintiffs’ attorney Patrick Coughlin said the price of HealthSouth stock dropped from a high of $31 a share to 9 cents a share once the fraud was revealed. HealthSouth stock rose 41 cents, about 9%, to $5.31 a share in over-the-counter trading on news of the agreement.

“We will continue to fight vigorously against HealthSouth auditors and underwriters who were central to HealthSouth’s fraudulent behavior,” Coughlin said.

HealthSouth came near bankruptcy after the fraud was revealed in March 2003, but it has since reconstructed years of financial statements and renegotiated lending agreements.