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HealthSouth faces fraud charges

BIRMINGHAM, Ala. — Federal charges were filed against HealthSouth Corp. and its chairman for allegedly overstating profits by at least $1.4 billion. Meanwhile, the government announced that a former company executive who pleaded guilty to fraud charges is cooperating with an investigation into the health care giant.

The Securities and Exchange Commission claimed in a civil accounting fraud complaint filed Wednesday that senior accountants, acting on chairman Richard Scrushy's orders, gathered in what they called "family meetings" to falsify earnings.

The complaint said the company had issued fake earnings at Scrushy's instruction since it went public in 1986. The SEC halted trading in the company for two days.

"HealthSouth's fraud represents an appalling betrayal of investors," said Stephen M. Cutler, SEC enforcement director.

The Birmingham-based company reported income before taxes of $1.6 billion from 1999 through June 30, 2002, but it really made only $169 million, the SEC complaint said.

HealthSouth spokeswoman Kristi Gilmore said the company had no immediate comment.

Scrushy's attorney William Clark issued a statement late Wednesday saying his client and HealthSouth have been cooperating with the SEC.

"Mr. Scrushy was shocked and surprised at the unexpected actions taken by the government over the past two days," Clark said.

The Justice Department also announced Wednesday that the company's former chief financial officer, Weston Smith, 42, has agreed to plead guilty to securities fraud, conspiracy and wire fraud charges, as well as false certification of financial records.

HealthSouth, founded by Scrushy and a few friends in 1984, is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services, with about 50,000 employees and 1,700 centers in all 50 states and abroad.

The SEC complaint, filed in federal court, asks that HealthSouth and Scrushy be ordered to repay any "ill-gotten gains" and unspecified civil penalties. It also seeks to freeze Scrushy's assets and bar him from acting as a director of any publicly held company.

The company's stock had plummeted after it announced in August that a Medicare billing change would hurt its earnings significantly. The government alleges that warning was actually a Scrushy-approved scheme to lower analysts' expectations.

Scrushy had sold half his stake in the firm, or some $25 million in stock, a few weeks before the August announcement.

The charges came a day after FBI agents served search warrants and interviewed workers at HealthSouth headquarters.

The company is also facing federal lawsuits and state suits in Alabama and Delaware seeking monetary damages for stockholders.

HealthSouth bond prices fell sharply Wednesday, an analyst said, indicating the company could be in danger of default because of difficulty raising capital.

"We would like to see the board of directors step up and disassociate the company from Mr. Scrushy," said Premila Peters, a vice president at KDP Investment Advisors, a credit analysis firm in Montpelier, Vt.