FOR IMMEDIATE RELEASE|
WEDNESDAY, MARCH 19, 2003
TDD (202) 514-1888
FORMER HEALTHSOUTH CHIEF FINANCIAL OFFICER AGREES TO PLEAD GUILTY IN PROBE OF CORPORATE FRAUD CONSPIRACY
WASHINGTON, D.C. – Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division and U.S. Attorney Alice Martin of the Northern District of Alabama announced today that the former chief financial officer of HealthSouth Corp., the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitative services, has agreed to plead guilty to securities fraud, conspiracy to commit securities and wire fraud, as well as false certification of financial records which were designed to inflate the company's revenues and earnings by hundreds of millions of dollars.
In a criminal information filed today at U.S. District Court in the Northern District of Alabama, Weston Smith was charged with conspiracy to commit securities fraud and wire fraud, securities fraud, and filing false certifications with the Securities and Exchange Commission. Smith, 42, of Hoover, Alabama, has agreed to cooperate with the federal government's ongoing investigation of corporate fraud at HealthSouth. He has agreed to forfeit any proceeds derived from illegal activity.
A plea hearing is expected at federal court in Birmingham at a later time.
FBI agents conducted a search of HealthSouth's headquarters in Birmingham last night. The investigation into HealthSouth's finances is active and ongoing, and additional criminal charges are expected.
HealthSouth is a publicly traded corporation organized under the laws of the state of Delaware, with headquarters in Birmingham. The company has approximately 1,600 locations in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. Smith was employed at HealthSouth since 1987, and served as Controller from about March 2000 to August 2001, as chief financial officer from about August 2001 to August 2002, and as executive vice president of inpatient operations since August 2002.
According to the criminal information filed today, beginning about 1997, Smith, along with the chief executive officer, another senior officer and others, recognized that HealthSouth was not producing sufficient earnings per share to meet Wall Street earning expectations. The difference between HealthSouth's true earnings per share and Wall Street expectations was referred to internally as the "gap" or the "hole."
The charges state that senior officers at HealthSouth conspired to fill the "gap" or "hole" with "dirt" – fraudulent postings that artificially inflated HealthSouth's earnings in order to meet the Wall Street earnings expectations and hide the true nature of HealthSouth's financial condition. As part of the conspiracy, HealthSouth's accounting staff, including Smith, would meet to discuss ways to fraudulently inflate the earnings. These meetings were known internally as "family meetings" and attendees were known as the "family."
To further the conspiracy, Smith and others allegedly falsified entries in HealthSouth's books and records, and designed fictitious entries to avoid their detection. The charges also state that on or about Aug. 14, 2002, Smith and others knowingly filed a false certification statement with the SEC, in violation of a provision of the Sarbanes/Oxley bill enacted into law last year. According to the court filings, the certification of HealthSouth's 10-Q for the second quarter of 2002 overstated HealthSouth's cash by more than $300 million and overstated total assets by approximately $1.5 billion.
The false certification criminal charge is believed to be the first in the country brought under requirements contained in Sarbanes/Oxley.
Deputy Attorney General Larry Thompson, the head of President Bush's Corporate Fraud Task Force, noted that investigators from the U.S. Attorney's Office, the Fraud Section, the FBI and the Securities and Exchange Commission worked quickly to finalize the plea and cooperation agreement. The investigation into HealthSouth's finances began seven days ago.
"This case demonstrates the Justice Department's commitment to real-time enforcement in corporate fraud cases," Thompson said. "We will move swiftly in our efforts to root out corporate fraud and restore investor confidence in the marketplace."
Assistant Attorney General Michael Chertoff of the Criminal Division added, "According to the charges, HealthSouth executives dug themselves into a financial hole and sought to fill it with lies. The goal and mission of the Corporate Fraud Task Force is to uncover, investigate and prosecute this kind of wrongdoing by corporate executives."
United States Attorney Alice Martin said, "Today's filing of an information confirms that swift and coordinated action by law enforcement will be taken against those who exploit financial information for personal profit at the expense of corporate investors."
The maximum sentence for conspiracy is five years imprisonment and a $250,000 fine. Smith also faces a maximum sentence of 10 years in prison and a $1 million fine on the charge of securities fraud, as well as a maximum sentence of 10 years in prison and a $1 million fine on the charge of filing false certification with the SEC.
The HealthSouth investigation is being conducted by the U.S. Attorney's Office for the Northern District of Alabama and the Fraud Section of the Criminal Division at the Department of Justice, in consultation with the Corporate Fraud Task Force. Agents from the FBI and investigators from the SEC are also assisting in the investigation.
The Corporate Fraud Task Force, chaired by Deputy Attorney General Thompson, was created by President Bush on July 9, 2002, to oversee and direct federal law enforcement actions against corporate corruption that had eroded investors confidence in the integrity of U.S. markets. The Justice Department and the Corporate Fraud Task Force have brought criminal charges against more than 160 individuals, including executives and current and former employees at WorldCom, Adelphia, Enron, Imclone, Qwest Communications and others.