IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

UNITED STATES OF AMERICA	)

)

v.	)

)

EMERY HARRIS,	)

Defendant	)

I N F O R M A T I O N

The United States Attorney charges, that at all times material to this Information:

Count 1

Conspiracy to Commit Wire Fraud, Securities Fraud and False Books and Records

Title 18, United States Code, Section 371

INTRODUCTION

1. Defendant EMERY HARRIS ("HARRIS") was employed at HealthSouth Corporation. ("HealthSouth") since 1992 in various capacities in the accounting department. In March 2000 [confirm] he was promoted to the position of Vice President of Finance and Assistant Controller.

2.	HealthSouth was a corporation organized under the laws of the State of Delaware with its headquarters in Birmingham, Alabama. HealthSouth claims to be the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services with approximately 1800 locations in all 50 states, Puerto Rico, the United Kingdom, Australia, and Canada. At all times relevant to this Information, HealthSouth's common stock was listed on the New York Stock Exchange.

3.	HealthSouth is an issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 ("the Act"). To sell securities to members of the public and maintain public trading of its securities in the United States, HealthSouth was required to comply with the provisions of the federal securities laws, including Section 13(a) of the Act (Title 15, United States Code, Sections 78m(a) and 78o(d)) and the regulations promulgated thereunder, that were designed to ensure that the company's financial information was accurately recorded and disclosed to the public.

4.	Under provisions of the federal securities laws and the provisions promulgated thereunder, HealthSouth was required to, among other things (a) file with the SEC annual financial statements audited by an independent accountant; (b) file with the SEC quarterly updates of its financial statements that disclosed its financial condition and the results of its business operations for each three-month period; (c) make and keep books, records, and accounts that accurately and fairly reflected the transactions and dispositions of the company's assets; and (d) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that – (i) the company's transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") and other criteria applicable to such statements and to maintain the accountability of assets; and (ii) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action was taken with respect to any differences.

5.	From 1986, when HealthSouth issued its initial public offering, it filed quarterly reports, such as Form 10-Q, and annual reports, such as Form 10-K, with the United States Securities and Exchange Commission ("SEC"), which is located in Washington, D.C. HealthSouth's quarterly and year-end financial statements were transmitted directly and indirectly from HealthSouth's offices in Birmingham, Alabama to the offices of RCI Group, Inc. in Washington, D.C., a filing agent that assists companies in electronically filing periodic reports with the SEC, and were thereafter transmitted electronically to and filed electronically with the SEC.
CERTAIN RELEVANT ACCOUNTING PRINCIPLES

6.	Public companies, such as HealthSouth, typically report the financial results of their operations in financial statements that include both an Income Statement and a Balance Sheet. A company's Income Statement reports, among other things, revenue recognized, expenses incurred, and income earned during a stated period of time – usually for a fiscal quarter or fiscal year. Within an Income Statement, expenses are generally subtracted from revenues to calculate net income. A company's Balance Sheet reports, among other things, the assets and liabilities of a company at a point in time, usually at the end of a fiscal quarter or the end of a fiscal year.

7.	In preparing and maintaining the company's books and records, HealthSouth's accounting staff employed certain accounting principles and financial statement line items specific to healthcare services providers. One such Income Statement line item was "contractual adjustments." The contractual adjustments account is a revenue allowance account that estimates the difference between the gross amount charged to the patient and the amount that various healthcare insurers will pay for a specific treatment. HealthSouth deducted this amount from gross revenues to derive net revenues, which were reported on HealthSouth's periodic reports filed with the SEC. Since GAAP generally require that any increase in revenue or decrease in expenses be matched with either an increase in assets or decrease in liabilities on the Balance Sheet, any manipulation of the contractual adjustment account resulting in an increase in revenues would require a corresponding entry on the Balance Sheet.

HEALTHSOUTH'S COMMUNICATIONS WITH INVESTORS

8.	The management of many public companies including HealthSouth provided "guidance" to the investing public regarding anticipated earnings per share for upcoming reporting periods. Relying in part on a company's "guidance," many professional securities analysts then disseminated to the public their own estimates of the company's expected performance. These "earnings estimates" or "analyst expectations" were closely followed by investors. Often, if a company announces earnings that fail to either meet or exceed analyst expectations, the price of the company's securities will decline.

9.	Numerous analysts of major Wall Street investment firms followed HealthSouth's performance and issued "guidance" estimates regarding its expected earnings. These analysts considered, among other things, HealthSouth management's "guidance" concerning estimated revenue, income and earnings per share, to gauge HealthSouth's performance, financial condition, and to predict HealthSouth's expected earnings. Similarly, market participants and members of the investing public considered and relied upon HealthSouth's periodic financial statements and guidance concerning actual operating results.

THE SECTION 1350 CERTIFICATION

10.	Beginning on or about July 30, 2002, Title 18, United States Code, Section 1350 required certain financial reports filed with the SEC by companies like HealthSouth to be accompanied by a statement, signed by the CEO and the CFO, certifying that the financial statements (Income Statement and Balance Sheet) fairly present, in all material respects, the financial condition and results of the company ("1350 statement").

HEALTHSOUTH'S EARNINGS SHORTFALLS

11.	Beginning at least in or about 1997, a group of HealthSouth's senior officers, which included the then Chief Executive Officer (the "CEO"), and officers who would become the Chief Operating Officer (the "COO"), the Chief Financial Officer (CFO), (collectively, the "Senior Officers") and others, recognized that HealthSouth's financial results were failing to produce sufficient earnings per share to meet or exceed Wall Street "earning expectations" or "analyst expectations." The difference between HealthSouth's true and correct earnings per share and the Wall Street expectations was referred to internally at HealthSouth as the "gap" or the "hole." The Senior Officers and others recognized that the earnings shortfall created a substantial risk that, unless HealthSouth's earnings per share were artificially inflated, HealthSouth's earnings would fail to meet analyst expectations and the market price of HealthSouth's securities would therefore decline.

THE CONSPIRACY

12.	Beginning in or about January 1996, and continuing until the present, within the Northern District of Alabama and elsewhere, the defendant, EMERY HARRIS, and others, knowingly and willfully conspired and agreed with each other, to commit an offense against the United States, to wit:

(1)	to devise and attempt to devise a scheme and artifice to defraud and to obtain money and property by means of material false and fraudulent pretenses, representations and promises and to knowingly transmit and cause to be transmitted, by means of wire communication, in interstate and foreign commerce, writings, signs, signals and sounds for the purpose of executing such scheme and artifice in violation of Title 18, United States Code, Section 1343;

(2)	to willfully and knowingly make and cause to be made false and misleading statements of material fact in applications, reports and documents required to be filed under the Securities and Exchange Act of 1934 and the rules and regulations thereunder in violation of Title 15, United States Code, Sections 78m(a) and 78ff and Title 17, Code of Federal Regulations, Sections 240.13a-1; 13a-13 and 13b2-2; and

(3)	to willfully and knowingly falsify books, records and accounts of HealthSouth in violation of Title 15, United States Code, Sections 78m(b) (2) (A) & (B), 78m(b) (5) and 78ff and Title 17, Code of Federal Regulations, Section 240.13b2-1.

THE PURPOSE OF THE CONSPIRACY

13.	The purpose of the conspiracy was for the defendant, EMERY HARRIS, the Senior Officers, and others to fraudulently enrich themselves by inflating artificially HealthSouth's publicly reported earnings and earnings per share and by fraudulently enhancing its reported financial condition.

THE MANNER AND MEANS OF THE CONSPIRACY

The manner and means by which the defendant and others sought to accomplish the conspiracy included, among other things, the following:

14.	It was part of the conspiracy that the Senior Officers, defendant HARRIS and others, engaged in an illegal scheme to inflate artificially HealthSouth's publicly reported earnings and earnings per share and falsify reports of HealthSouth's financial condition.

15.	It was further part of the conspiracy that defendant HARRIS would provide the CFO and the COO with monthly and quarterly preliminary reports showing HealthSouth's true and actual financial results and that these reports would be provided to the CEO.

16.	It was further part of the conspiracy that after reviewing the preliminary reports on HealthSouth's actual monthly and quarterly earnings numbers, the Senior Officers would direct defendant HARRIS 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.

17.	It was further part of the conspiracy that after the Senior Officers issued instructions as to the desired earnings per share number, members of HealthSouth's accounting staff, including defendant HARRIS, would meet to discuss ways to inflate artificially HealthSouth's earnings in order to meet the Wall Street earnings expectations. These meetings were known as "family" meetings and the attendees were known as the "family." At the meetings the "family" members discussed how 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 "gap" or "hole" were referred to as the "dirt."

18.	It was further part of the conspiracy that defendant HARRIS made and directed others to make false and fraudulent entries in HealthSouth's books and records for the purpose of inflating artificially HealthSouth's revenue and earnings per share. Methods for artificially inflating HealthSouth's revenue and earnings per share included falsifying the "contractual adjustment" account and decreasing other expenses. After manipulating the "contractual adjustment" and other expense accounts to artificially inflate revenue on the Income Statement, defendant HARRIS and others made and caused to be made corresponding fraudulent adjustments to increase assets and decrease liabilities shown on HealthSouth's Balance Sheet. Thus, false and fraudulent entries were made to accounts in HealthSouth's books and records including, but not limited to, the: (1) Property, Plant and Equipment ("PP&E") account; (2) cash account; (3) inventory account; and (4) intangible asset (goodwill) accounts. Each of these accounts was reported in HealthSouth's Balance Sheets. As defendant HARRIS and his co-
conspirators well knew, there was no justification in fact, or under GAAP, for these entries.

19.	It was further part of the conspiracy that defendant HARRIS and his co-
conspirators, acting at the direction of the Senior Officers, would falsify HeathSouth's books and records by making thousands of phony asset entries to the PP&E accounts of HealthSouth's various medical facilities. In some cases, when these facilities were sold, defendant HARRIS and his co-conspirators, in order to continue the scheme, moved hundreds of millions of dollars of fraudulently created assets to other hiding places on HealthSouth's books and records including the cash account.

20.	It was further part of the conspiracy that defendant HARRIS and other HealthSouth accounting personnel designed the fictitious accounting entries to avoid their detection. For example, if the accounting staff decided to increase inventories, it would increase inventory accounts at various HealthSouth facilities by different false amounts because they knew that if amounts were increased uniformly, suspicions of the auditors might be raised. In addition, since the HealthSouth accounting staff knew that auditors questioned additions to the PP&E account which exceeded a certain threshold, the bogus additions to PP&E at a particular facility were kept below the threshold.

21.	It was further part of the conspiracy that defendant HARRIS and his co-
conspirators created and caused to be created false and fictitious documents to be provided to HealthSouth's auditors for the purpose of concealing the massive accounting fraud. The names of fraudulently enhanced property accounts were changed to make the false accounts appear routine. Further, if HealthSouth's auditors questioned a particular asset account, defendant HARRIS and others in HealthSouth's accounting department created bogus invoices and provided them to the auditors.

22.	It was further part of the conspiracy that defendant HARRIS, the Senior Officers and their co-conspirators made and caused to be made the false and fraudulent journal entries in HealthSouth's books and records knowing, and intending (1) that such journal entries would ultimately be reflected in HealthSouth's financial statements and public filings with the SEC; (2) that HealthSouth's financial statements and public filings would falsely overstate HealthSouth's revenue, earnings per share; and assets (3) that the investing public would rely upon such fraudulently overstated earnings and earnings per share.

23.	It was further part of the conspiracy that the Senior Officers, defendant HARRIS, and others caused HealthSouth to file publicly with the SEC annual reports and quarterly reports that materially misstated, among other things, HealthSouth's net income, revenue, earnings per share, assets, and liabilities from at least 1999 until the present. As a result of the scheme, HealthSouth's revenue and earnings were inflated by hundreds of millions of dollars on publicly filed reports. For example, the Balance Sheet included in HealthSouth's 10-Q for the second quarter of 2002, overstated gross PP&E by approximately $1 billion or approximately 33% of the total PP&E reported. The amount of cash on the same 10-Q was overstated by more than $300 million and HealthSouth's total gross assets were overstated by more than $1.5 billion.

24.	It was further part of the conspiracy that in or about August 2002, in order to cover up and conceal the materially false and misleading financial information which HealthSouth had provided to the SEC and the public in the past, the Senior Officers met and discussed the need for the CFO to sign and file with the SEC a statement in which he falsely certified that HealthSouth's financial statements fairly presented, in all material respects, the financial condition and results of operations of HealthSouth.

25.	It was further part of the conspiracy that the Senior Officers agreed that the CFO and the CEO would sign and cause to be filed with the SEC, a statement certifying that HealthSouth's 10-Q for the second quarter of 2002 fairly presented, in all material respects, the financial condition and results of HealthSouth, when in truth and fact, the Senior Officers and defendant HARRIS knew that the 10-Q contained materially false and misleading information.

OVERT ACTS

26.	In furtherance of the conspiracy and to achieve the objects thereof, defendant HARRIS, the Senior Officers and others committed and caused to be committed various acts in the Northern District of Alabama and elsewhere:

(a)	In or about the third week of the last month of each fiscal quarter, defendant HARRIS prepared a report showing HealthSouth's actual consolidated operating results and provided the report to the CFO and the COO.

(b)	In or about the third week of the last month of each fiscal quarter, at the direction of the Senior Officers, defendant HARRIS and others falsified HealthSouth's revenue numbers to

ensure that HealthSouth's earnings per share numbers met or exceeded Wall Street analyst expectations.

(c)	In or about the third week of the last month of each fiscal quarter, defendant HARRIS and his co-conspirators in HealthSouth's accounting department artificially inflated HealthSouth's revenue numbers in accord with the instructions of the Senior Officers.

(d)	On or about November 13, 2001, the CFO signed HealthSouth's10-Q for the third quarter of 2001 knowing that it did not fairly present, in all material respects, the financial condition and results of operations of HealthSouth.

(e)	On or about August 14, 2002, the CEO signed HealthSouth's 10-Q for the second quarter of 2002, representing that it fairly presented, in all material respects, the financial condition and results of HealthSouth.

(f)	On or about August 14, 2002, the CEO caused to be transmitted by wire from Birmingham, Alabama, directly and indirectly, to the SEC, in Washington, D.C., HealthSouth's 10-Q for the second quarter of 2002 signed by the CEO and the CFO.

(g)	On or about August 14, 2002, the CEO signed the 1350 statement certifying that HealthSouth's 10-Q for the second quarter of 2002 fairly presented, in all material respects, the financial condition and results of operations of HealthSouth.

(h)	On or about August 14, 2002, the CEO caused to be transmitted by wire from Birmingham, Alabama directly and indirectly, to the SEC, in Washington, D.C., the 1350 statement certifying that HealthSouth's 10-Q for the second quarter of 2002 fairly presented, in all material respects, the financial condition and results of operations of HealthSouth signed by the CFO and the CEO.

(i)	On or about November 14, 2002, the Senior Officers caused to be transmitted by wire from Birmingham, Alabama, directly and indirectly, to the SEC, in Washington, D.C., the 1350 statement certifying that HealthSouth's 10-Q for the third quarter of 2002 fairly presented, in all material respects, the financial condition and results of operations of HealthSouth.

All in violation of Title 18, United States Code, Section 371.

Count 2

False Books and Records

Title 15, United States Code, Sections 78m(b) (2) (A), 78m(b) (5) and 78ff

Title 17, Code of Federal Regulations, Sections 240.13b2-1 and

Title 18, United States Code, Section 2.

1.	The allegations contained in ¶¶ 1 through 11 of Count 1 are repeated and realleged as though set forth in full in this Count.

2.	The allegations contained in ¶¶ 14 through 26 of Count 1 are repeated and realleged as though set forth in full in this Count as describing the falsification of HealthSouth's books and records.

3.	From in or about 1999 until June 2002, in the Northern District of Alabama, and elsewhere defendant EMERY HARRIS and others, unlawfully, willfully, and knowingly, directly and indirectly, falsified and caused to be falsified, books, records, and accounts which, in reasonable detail, accurately reflected the transactions and dispositions of the assets of HealthSouth, to wit: defendant HARRIS made and caused to be made false entries on the books and records of HealthSouth which resulted in the falsification of Cash Flow Statement line items, including: (1) revenue; (2) contractual adjustments; (3) expenses; and (4) earnings per share and Balance Sheet line items, including: (1) PP&E; (2) cash; (3) inventory; and (4) intangible assets

(goodwill), which resulted, and were intended to result, among other things, in the filing of false quarterly and annual financial statements with the SEC.

All in violation of Title 15, United States Code, Sections 78m(b) (2) (A), 78m(b) (5), and 78ff, Title 17, Code of Federal Regulations, Section 240.13b2-1, and Title 18, United States Code, Section 2.

Count 3

Forfeiture

Title 18, United States Code, Section 981(a)(1)(C) &

Title 28, United States Code, Section 2461(c)
The United States Attorney further charges:

1.	That Counts One and Two of this Information are incorporated by reference herein for the purpose of alleging criminal forfeiture pursuant to Title 18, United States Code, Section 981(a)(1)(C) and Title 28, United States Code, Section 2461(c).

2.	As a result of the foregoing offenses alleged in Count One of this Information, the defendant, EMERY HARRIS, shall forfeit to the United States any property constituting or derived from proceeds traceable to said violations committed by the defendant, EMERY HARRIS. Such forfeitable interests include, but are not limited to, any and all interest and proceeds derived therefrom.

3.	If any of the property described above as being subject to forfeiture pursuant to Title 18, United States Code, Section 981(a)(1)(C), and Title 28, United States Code, Section 2461(c), as a result of any act or omission of the defendant, EMERY HARRIS –

(1) cannot be located upon the exercise of due diligence;

(2) has been transferred to, sold to, or deposited with a third person;

(3) has been placed beyond the jurisdiction of the Court;

(4) has been substantially diminished in value; or

(5) has been commingled with other property that cannot be subdivided without difficulty;

it is the intent of the United States, pursuant to Title 21, United States Code, Section 853(p), to seek forfeiture of any other property of said defendant, EMERY HARRIS, up to the value of the above forfeitable property.

All pursuant to Title 18, United States Code, Section 981(a)(1)(C) and Title 28, United States Code, Section 2461(c).

____________________________

ALICE H. MARTIN	JOSHUA R. HOCHBERG

United States Attorney	Chief, Fraud Section

Northern District of Alabama	Criminal Division

United States Department of Justice

____________________________	by:	______________________________

GEORGE A. MARTIN	RICHARD C. SMITH

Assistant United States Attorney	Deputy Chief, Fraud Section

Northern District of Alabama	Criminal Division
United States Department of Justice

____________________________	_______________________________

MIKE RASMUSSEN	RICHARD N. WIEDIS

Assistant United States Attorney	Senior Trial Attorney, Fraud Section

Northern District of Alabama	Criminal Division

United States Department of Justice