FOR IMMEDIATE RELEASE|
THURSDAY, APRIL 3, 2003
TDD (202) 514-1888
FIVE HEALTHSOUTH OFFICERS CHARGED WITH CONSPIRACY TO COMMIT WIRE AND SECURITIES FRAUD
WASHINGTON, D.C. - Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division, U.S. Attorney Alice H. Martin of the Northern District of Alabama, and Carmen S. Adams, Special Agent in Charge of the FBI Birmingham field office, announced today that criminal charges have been filed against five HealthSouth Corp. officers in connection with accounting fraud.
A three-count criminal information filed at federal court in Birmingham, Alabama, this morning charges the following individuals with wire fraud and conspiracy to commit wire and securities fraud:
Angela C. Ayers, 33, of Hoover, Alabama, a HealthSouth Vice President in the accounting department;
Cathy C. Edwards, 39, of Hoover, a HealthSouth Vice President in the accounting department;
Rebecca Kay Morgan, 35, of Pelham, Alabama, Group Vice President in the accounting department; and
Virginia B. Valentine, 33, of Chelsea, Alabama, an Assistant Vice President in the accounting department.
A second criminal information filed today charges HealthSouth Chief Information Officer Kenneth Livesay, 42, of Birmingham, with conspiracy to commit wire fraud and securities fraud and to falsifying financial information of HealthSouth that was used in filing false quarterly and annual financial statements with the SEC.
All five defendants have agreed to plead guilty to the charges and cooperate with the government's ongoing investigation into HealthSouth's finances.
Count 1 of the criminal information on Ayers, Edwards, Morgan and Valentine alleges that a conspiracy existed from in or about 1994 until the present between the four defendants and HealthSouth senior officers William Owens, Weston Smith, Emery Harris and others to devise a scheme to artificially inflate HealthSouth's publicly reported earnings and the value of its assets, and to falsify reports of HealthSouth's financial condition. It was part of the conspiracy that Owens, Smith, Harris and others would provide the Chief Executive Officer with monthly and quarterly preliminary reports showing HealthSouth's true and actual financial results. After reviewing these reports, Owens, Smith, Harris and others would direct that HealthSouth's accounting staff find ways to ensure that HealthSouth's "earnings per share" number met or exceeded Wall Street analyst expectations. After Owens, Smith, Harris and others issued instructions as to the desired earnings per share number, HealthSouth's accounting staff would meet to discuss ways to artificially inflate HealthSouth's earnings to meet the CEO's desired earnings numbers.
These meetings were known as "family" meetings, and attendees were known as the "family." At the meetings, participants would discuss ways by which members of the accounting staff would falsify HealthSouth's books to fill the "gap" or "hole" and meet the desired earnings. The fraudulent postings used to fill the "hole" were referred to as the "dirt." Owens, Smith, Harris and others would and did direct one or more of the defendants, also members of the accounting staff, to make false entries in HealthSouth's books and records for the purpose of artificially inflating HealthSouth's revenues and earnings. Owens, Smith, Harris and others would direct one or more of the defendants to make corresponding false entries in HealthSouth's books and records for the purpose of artificially inflating the value of its assets, including, but not limited to, false entries made to (a) Property, Plant and Equipment (PP&E) accounts; (b) cash accounts; (c) inventory accounts; and (d) intangible asset (goodwill). When events required that financial records and reports related to units of HealthSouth were called for by auditors, purchasers and others, Owens, Smith, Harris and others would direct one or more of the defendants to generate records and reports that would back out the false entries. Owens, Smith and one or more of the defendants would, for the purpose of deceiving auditors, manufacture false documents for the purpose of supporting false record entries. One or more of the defendants would and did change codes on accounts to deceive auditors.
The criminal information alleges that, as a result of the scheme, Ayers made and caused to be made false entries into the asset accounts and contractual accounts of HealthSouth each fiscal quarter from 1999 through 2002; Edwards made and caused to be made false entries into the asset accounts of HealthSouth each fiscal quarter from 2001 through 2002; Morgan made and caused to be made false entries in the cash accounts of HealthSouth each fiscal quarter from 1999 through mid-2002; and Valentine made and caused to be made false entries in the contractual allowance accounts of HealthSouth each fiscal quarter from 1999 through mid-2002.
Count 2 of the criminal information charges Edwards and Morgan with committing wire fraud, in that, being aware of the scheme, they willfully caused the wire transmission of HealthSouth's Form 10-Q for the third quarter of 2001 in interstate commerce from Birmingham, Alabama, to Washington, D.C. for filing with the SEC, in violation of 18 USC Sections 1343 and 2. Count 3 of the information seeks forfeiture of any property which constitutes or was derived from proceeds traceable to these securities violations by the defendants.
Count 1 of the three-count information against Livesay alleges that beginning as early as 1996 and continuing until approximately November 1999, Livesay conspired and agreed with others to devise a scheme to artificially inflate HealthSouth's publicly reported earnings and the value of its assets, and to falsify reports of HealthSouth's financial condition. The purpose of the conspiracy was for Livesay, senior HealthSouth officers and others to fraudulently enrich themselves.
As part of the conspiracy, Livesay and others would provide the CEO and Chief Operating Officer with monthly and quarterly reports showing HealthSouth's true and actual financial results. After reviewing the preliminary reports the senior officers would direct Livesay and other members of HealthSouth's accounting staff to find ways to ensure that HealthSouth's earnings per share number met or exceeded Wall Street analyst expectations. Methods included overbooking reserve accounts, sometimes referred to as "socks" which could later be bled out into revenue, creating fictitious entries in the fixed assets system known as "AP Summaries," and overstating intangible assets accounts. After manipulating these accounts and other expense accounts to artificially inflate revenue on the income statement, Livesay and others made and caused to be made corresponding fraudulent adjustments to increase assets and decrease liabilities shown on HealthSouth's balance sheet.
Livesay and his co-conspirators, acting at the direction of senior officers, would falsify HealthSouth's books and records by making thousands of phony entries to various HealthSouth accounts, involving more than 1,000 HealthSouth facilities. In some cases, when facilities were sold, Livesay and his co-conspirators moved hundreds of millions of dollars of fraudulently created assets to other hiding places on HealthSouth's books and records, including the cash account. Livesay and other accounting personnel designed the fictitious documents to be provided to HealthSouth's auditors for the purpose of concealing the massive accounting fraud. Livesay, the senior officers and their co-conspirators made these false entries intending that they would ultimately be reflected in HealthSouth's financial statements and public filings with the SEC; that these filings would falsely overstate HealthSouth's revenue, earnings per share and assets; and that the investing public would rely upon such fraudulently overstated earnings and earnings per share.
Count 2 of the information charges Livesay with falsifying HealthSouth's financial records for the purpose of generating false reports to be filed with the SEC, in violation of 15 USC Section 78m(b)(2)(A), 78m(b)(5) and 78ff, 17 CFR Section 240.13b2-1 and 18 USC Section 2. The third count of the information seeks forfeiture to the United States of any property derived from proceeds traceable to these securities violations.
"These accounting executives carried out the orders of superiors in the accounting department at HealthSouth. Today they face the consequences of these illegal actions," said U.S. Attorney Alice Martin. "Each of these defendants are cooperating fully with my office. I urge others to follow their lead and contact my office to discuss how they can best 'help themselves' in this investigation, which continues as to the finance department personnel and others at HealthSouth."
HealthSouth was a corporation organized under the laws of the state of Delaware, with headquarters in Birmingham, Alabama. HealthSouth claims to be the nation's largest provider of outpatient surgery, diagnostic and imaging and rehabilitative healthcare services, with approximately 1,800 facilities in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. The company employs more than 33,000 employees.
Earlier this week, HealthSouth Vice President of Finance Emery Harris became the third person to plead guilty to charges related to accounting fraud at HealthSouth. Chief Financial Officer William Owens and former CFO Weston Smith had previously pleaded guilty. All three men are cooperating with the government's investigation, which is active and ongoing.
The investigation is being conducted by the FBI-Birmingham Field Office, with assistance from the Securities and Exchange Commission, Atlanta District-Enforcement Division. The prosecution is being handled by U.S. Attorney Martin and Assistant U.S. Attorneys with the White Collar Section and Asset Forfeiture Section of the U.S. Attorney's Office for the Northern District of Alabama, with assistance from attorneys with the Fraud Section of the Criminal Division of the Department of Justice. The case is being overseen by the Corporate Fraud Task Force, chaired by Deputy Attorney General Larry Thompson.