U.S. Details HealthSouth Losses

HealthSouth Corp. probably lost money in at least five years in which then-Chief Executive Richard Scrushy said the hospital operator was profitable, according to court records made public Monday.

HealthSouth inflated profit by $70 million in 1996, $700 million in 1997, $550 million in 1998, $390 million in 1999, $350 million in 2000, $450 million in 2001 and $230 million last year, according to an indictment of Scrushy.

The year-by-year breakdown released by prosecutors gives investors a gauge of the magnitude of restatements the company will need to make. U.S. attorneys say Scrushy reported $2.74 billion in fake income to beat analysts’ earnings estimates and drive up shares of HealthSouth, a move that enabled him to make acquisitions and demand higher compensation.

“It says a lot about how dramatically they were misleading people,” said SG Cowen Securities Corp. analyst Kemp Dolliver. “Those are huge numbers.”

A comparison of the figures in the indictment with the net income figures reported by HealthSouth in regulatory filings suggests that there were losses in at least five years.

HealthSouth has said forensic auditors from PricewaterhouseCoopers expect to finish reconstructing the company’s books by the end of the year. Laura Smith, a spokeswoman for HealthSouth, said the company had no comment.

The government’s allegations were based on work done by those auditors, said U.S. Atty. Alice Martin, who is leading the prosecution. Former HealthSouth executives also are helping prosecutors after pleading guilty to fraud.

“I can tell you that, based on our understanding of the accounting, the fictitious income actually swung them in some years from a loss to reporting a profit,” Martin said. She wouldn’t comment on specific total profit or loss figures.

With the exception of last year, the government estimates show a pattern of HealthSouth inflating profit enough to meet Wall Street estimates. In 2002, a net loss of $270.1 million would have been almost twice as large without phony profit, the government alleges.

In another example, the firm met forecasts in 1997 by adding $700 million in phony profit, the indictment said. HealthSouth reported net income of $343.1 million for that year.

Last week, HealthSouth board members, investment bankers from UBS and auditors from Ernst & Young testified before a congressional committee that they weren’t aware of any fraud. Members of the House Energy and Commerce Committee chastised the directors and outside auditors for ignoring warning signs.

“We share your outrage,” Ernst & Young executive James Lamphron told the panel. “We thought we had a fast-growing company that was the pride of Birmingham [Ala.]. We now know they weren’t making money and in some years were losing money.”

Prosecutors said Scrushy collected $279 million in ill-gotten gains from fraud, including salary, bonuses and stock options that were based on the company’s performance.

Scrushy laundered some of the proceeds, the government said, and prosecutors want him to forfeit waterfront homes, paintings by Picasso and Renoir, a yacht, a Cessna airplane, a Lamborghini and jewelry such as a 48-carat diamond bracelet.