NEWSMAKER-Midnight strikes for Cinderella HealthSouth CEO
Wednesday March 19, 7:50 pm ET
By William Borden
biz.yahoo.com
NEW YORK, March 19 (Reuters) - Perks and a big paycheck came with founding a $4 billion company, but now HealthSouth Corp. (NYSE:HRC - News) Chairman and Chief Executive Richard Scrushy is contending with fraud charges.
U.S. regulators on Wednesday accused Scrushy and the health care company he founded of accounting fraud by overstating earnings by at least $1.4 billion since 1999. On Wednesday, the U.S. Justice Department said HealthSouth's former Chief Financial Officer Weston Smith pleaded guilty to conspiracy to commit securities fraud and wire fraud.
Scrushy is the first chief executive to be accused of violating the Sarbanes-Oxley (News - Websites) Act of 2002, which requires top executives at publicly traded companies to certify the accuracy of financial results.
The charges raise difficult questions for HealthSouth's board, which has been criticized for its close links to Scrushy, and the company's relationships with doctors and patients. HealthSouth is the largest U.S. operator of physical therapy, diagnostic imaging and outpatient surgery centers. The company operates 1,700 facilities in the United States and internationally.
"This certainly doesn't bode well for physician retention or patient retention, as the fraud and the claims of the SEC (Securities and Exchange Commission (News - Websites)) have been so widely publicized," said Angie Samfillippo, analyst at U.S. Bancorp Piper Jaffray.
Scrushy, who founded the company in 1984 with four partners who together pooled $50,000, had been the target of criticism from investors over his pay package and the board's perceived lack of independence. A fleet of corporate jets and HealthSouth's financials also raised investor ire.
Last year, he sold $100 million in HealthSouth stock.
Several Wall Street analysts published research reports last year questioning management's credibility after the company disclosed a cash flow shortfall following a Medicare reimbursement change in late August that led the stock to fall more than 60 percent.
"The disclosure that is coming out today is worse than anybody ever imagined. If you had to start out with a blank sheet of paper and had to draw up a worst case scenario for management credibility, this would be it," said one industry analyst, who asked not to be named.
Scrushy and HealthSouth, which had more than $4 billion in revenue in 2002, did not return calls for comment.
A leading figure in Birmingham, Alabama, Scrushy is building a "digital hospital" in the city HealthSouth calls home.
Scrushy also has interests beyond HealthSouth, which include managing the career of girl-band 3rd Faze. Scrushy, himself, has played in bands and recorded music.
While his 2002 compensation has not yet been disclosed with regulators, Scrushy received over $10 million in bonuses and salary in 2001, plus 1.2 million in options.
By comparison, Jack Bovender Jr. received a $1.02 million in salary, no bonus, and $1.17 million in restricted stock to run HCA Inc. (NYSE:HCA - News), a U.S. hospital operator that is nearly five times larger than HealthSouth.
BOARD VIEWED AS LACKING INDEPENDENCE
Critics blame Scrushy's close ties to the board as a key reason for the company's problems and poor investment decisions.
"It was a completely captive board and completely unobjective," the industry analyst said, adding that the directors appeared not to be independent.
Under pressure after August's announcement following the Medicare change, HealthSouth added new directors to a board that has several members dating to the mid-1980s and have personal ties to Scrushy.
The company's stock has been trading at lows not seen since 1993.
Investors have pointed to a report last year in "Flying Magazine" that mentions HealthSouth's fleet of 13 aircraft and full-time pilots as a symptom of poor investment decisions. Scrushy, a licensed pilot, was quoted in the magazine as saying the company would be "a fifth the size" without the aircraft.
SCRUSHY'S HUMBLE ROOTS
Scrushy's jet-set lifestyle is a stark contrast from very humble beginnings.
According to published reports, Scrushy worked as a service station attendant at age 17 in Selma, Ala. with a wife and a baby on the way. He then took a job as a respiratory technician working with his mother.
He graduated from the University of Alabama and worked at Lifemark's respiratory therapy division and eventually ran their pharmacy, physical rehabilitation and hospital acquisition divisions, published reports said.
"I don't doubt he got into the business for patient care," Samfilippo said. "He was a clinician when he started the company."
After forming HealthSouth in 1984, the company began its rapid ascent by acquisitions and building HealthSouth into a brand name like McDonald's and Nike.
The unnamed industry analyst said the plan went awry in the mid-1990s when HealthSouth used aggressive acquisitions to meet earnings targets.
Frank Morgan, analyst at Jefferies & Co Inc., said the company faced constraints in the late 1990s when managed care contracts and the Balanced Budget Act of 1997 hurt HealthSouth's profits.
Analysts said they saw warning signs of accounting problems when the company took $640 million in pre-tax charges for 2002.
After the FBI raided the company's offices on Tuesday night and with an ongoing SEC investigation, Howard Schiffman, a partner at Dickstein Shapiro Morin & Oshinsky in Washington, said the allegations against Scrushy are "very serious". |
