FOR IMMEDIATE RELEASE|
TUESDAY, NOVEMBER 4, 2003
TDD (202) 514-1888
HEALTHSOUTH FOUNDER AND FORMER CEO RICHARD SCRUSHY
CHARGED IN $2.7 BILLION ACCOUNTING FRAUD CONSPIRACY
WASHINGTON, D.C. - Assistant Attorney General Christopher A. Wray of the Criminal Division, U.S. Attorney Alice H. Martin of the Northern District of Alabama, Carmen S. Adams, Special Agent in Charge of the FBI-Birmingham Field Office, and Internal Revenue Service Commissioner Mark W. Everson announced today that Richard M. Scrushy, a former chief executive officer and chairman of the board of HealthSouth Corp., has been charged in an 85-count indictment stemming from a wide-ranging scheme to defraud investors, the public and the U.S. government about HealthSouth’s financial condition.
Scrushy, 51, of Birmingham, Alabama, surrendered at FBI Headquarters in Birmingham. The case has been assigned to the Honorable Karon O. Bowdre, U.S. District Court Judge.
The indictment was returned by a federal grand jury in Birmingham last Wednesday and unsealed this morning. The indictment charges Scrushy with conspiracy, mail, wire and securities fraud, false statements, false certifications and money laundering. The indictment also seeks forfeiture of more than $278.7 million in property which Scrushy derived from proceeds of the alleged offenses, including several residences, boats, aircraft and luxury automobiles.
“As alleged, instead of telling the public the truth, Richard Scrushy and his accomplices lied - they cooked HealthSouth’s books and Scrushy personally vouched for false financial statements with the SEC to cover up their scheme,” said Assistant Attorney General Christopher Wray. “These charges show that the government has important new tools to hold executives accountable for corporate fraud, and we won’t hesitate to use them where the evidence warrants it.”
“CEOs owe a fiduciary duty to investors, and the vast majority uphold that duty. However, for those who do not, our message is that no executive is above the law and through our forfeiture efforts we will work to show that crime doesn’t pay,” stated U.S. Attorney Alice H. Martin.
HealthSouth Corporation, founded in 1984, was the nation’s largest provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services, with approximately 1,800 locations in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. Scrushy served as chairman of the Board of Directors from 1984 through early 2003, and as chief executive officer of the company during that time, except for periods in late 2002 and early 2003. Scrushy and other HealthSouth executives received salaries, bonuses, stock options and other benefits that were tied, directly or indirectly, to the company’s financial performance. From 1996 through 2002, Scrushy received approximately $267 million in compensation from HealthSouth, including $7.5 million in base salary, more than $53 million in bonuses, and stock options valued at more than $206 million when exercised.
Scrushy controlled HealthSouth while CEO and Chairman of the Board, and personally participated in the preparation of financial statements and other financial documents. The indictment alleges that Scrushy caused HealthSouth to falsify financial statements, making the company appear more successful than it actually was.
The indictment alleges that between 1996 and 2003, internal reports by HealthSouth’s corporate accounting staff showed that the company routinely failed to produce sufficient net income to meet the expectations of Wall Street securities analysts, the market and its own internal budgets - a failure that Scrushy and others allegedly referred to as “not making the numbers.” According to the indictment, Scrushy and others devised a scheme to inflate HealthSouth’s earnings by making false and fraudulent entries in HealthSouth’s books and records, and to cover up the accounting fraud with false financial filings and statements. The indictment alleges that the scheme added approximately $2.7 billion in fictitious income to HealthSouth’s books and records during the course of the conspiracy. The indictment further alleges that Scrushy paid himself and others in the form of salaries, bonuses and stock options as a result of the fraudulently inflated results.
According to the indictment, Scrushy and his accomplices would meet to discuss HealthSouth’s actual financial performance and the need to falsify those internal results before they were publicly reported. The indictment states that Scrushy, through his accomplices, caused members of the corporate accounting staff to falsify the company’s books and records. The fraud allegedly included false entries in income statement and balance sheet accounts, including property, plant and equipment accounts, cash accounts and accounts receivable, among others. According to the indictment, the co-conspirators referred to those methods as “filling the hole” or “filling the gap.”
As part of the conspiracy, Scrushy and other co-conspirators allegedly signed and filed false statements with the Securities and Exchange Commission, and sought to conceal the fraud by controlling the internal distribution of actual financial results and providing false information to federal and state tax authorities. The indictment also alleges that Scrushy sought to control his co-conspirators, HealthSouth employees and the company’s Board of Directors by, among other things, threats, intimidation, electronic and telephonic surveillance, and reading their e-mails. To further control others at HealthSouth, Scrushy allegedly obtained large compensation packages for co-conspirators and offered them other incentives to keep them from discussing the fraudulent scheme, including, at one point in early 2003, an offer to take care of a co-conspirator’s family if the co-conspirator would take the blame for HealthSouth’s financial overstatements.
The indictment alleges that Scrushy knowingly signed false statements to the SEC, including a false 10-Q form for the third quarter of 2002, in violation of the recently enacted Sarbanes/Oxley law. Scrushy also allegedly continued the scheme through false representations to HealthSouth’s stockholders and the rest of the investing public through press releases that misstated HealthSouth’s financial condition. In June 2000, for example, Scrushy appeared in a HealthSouth State of the Company videotape, stating that “we have remained committed to prudent fiscal policy and the integrity of our balance sheet,” and boasting that HealthSouth had an outstanding balance sheet. In early 2003, Scrushy boasted at a company managers meeting that HealthSouth did not have the same type of problems as WorldCom and Tyco.
The money laundering counts of the indictment allege that Scrushy knowingly engaged in financial transactions using criminally derived property, including the purchase of land, aircraft, boats, cars, artwork and jewelry, among other items. The indictment seeks forfeiture of all such gains derived from criminal activity, totaling $278,727,674.35, including: several residences in the state of Alabama and property in Palm Beach, Florida; a 92-foot Tarrab yacht called Chez Soiree, a 38-foot Intrepid Walkaround watercraft and a 42-foot Lightning boat; a 1998 Cessna Caravan 675, together with amphibious floats and other equipment, and a 2001 Cessna Citation
525 aircraft; diamond jewelry; several luxury automobiles, including a 2003 Lamborghini Murcielago, a 2000 Rolls Royce Corniche, and two 2002 Cadillac Escalades; and paintings by Pablo Picasso, Marc Chagall, Pierre-August Renoir, among others.
If convicted of all the charges, Scrushy faces a possible maximum sentence of 650 years in prison and more than $36 million in fines, in addition to the forfeiture.
Carmen Adams, Special Agent in Charge of the Birmingham FBI Field Office, stated: “The HealthSouth investigation is unprecedented in its size and scope for the Birmingham FBI. The indictment of Mr. Scrushy marks a great and necessary step forward in restoring the community’s trust and confidence in its corporations and business leaders. This indictment is the result of the tireless efforts of scores of investigators and support personnel from the FBI, SEC, IRS and Postal Inspectors who have followed and uncovered the evidence of a very complex scheme to defraud and diligently moved this case forward.”
“The IRS will use its financial expertise to help the government hold accountable those executives who engage in fraud,” said IRS Commissioner Mark W. Everson. “Our investigation supports the Department of Justice seizure actions against Mr. Scrushy, involving a staggering sum of money, over a quarter of a billion dollars, which he accumulated during a seven-year period.”
The HealthSouth investigation is continuing. The investigation is being conducted by the FBI-Birmingham Field Office, the Internal Revenue Service-Birmingham Division and the U.S. Postal Inspection Service. The prosecution is being handled by U.S. Attorney Alice H. 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, and the Fraud and Asset Forfeiture and Money Laundering Sections of the Criminal Division of the Department of Justice in Washington, D.C. The investigation is being overseen by the Corporate Fraud Task Force, established by President Bush in July 2002 to investigate and prosecute allegations of fraud and other illegal conduct by executives at U.S. corporations. The Task Force is headed by Acting Deputy Attorney General Robert McCallum.
Sixteen individuals have been charged with crimes in connection with the HealthSouth investigation since it began in March 2003. The government has secured 14 guilty pleas from those individuals, including former HealthSouth Chief Financial Officers Aaron Beam, Michael Martin, William Owens, Weston Smith, Malcolm McVay and Vice President of Finance Emery Harris. All 14 of these defendants are cooperating with the government in this prosecution and the ongoing investigation.
The U.S. Attorney’s Office has established a telephone line for victims of HealthSouth to call in information, and a victims’ form on its website, at www.usdoj.gov/usao/aln, <http://www.usdoj.gov/usao/aln,> through HealthSouth News on the home page. The telephone hotline number is (866) 777-0912.
Members of the public are reminded that an indictment contains only charges. A defendant is presumed innocent of the charges and it will be the government’s burden to prove a defendant’s guilt beyond a reasonable doubt at trial.