Judge: HealthSouth Fraud Cost Shareholders $66 Million
Associated Press BIRMINGHAM, Ala. -- A federal judge rejected a key government claim in the fraud case engulfing HealthSouth Corp. (HLSH), ruling the scam cost shareholders $66 million -- a fraction of the $2.8 billion prosecutors suggested.
The decision by U.S. District Judge Inge Johnson applies only to the first five of 15 former HealthSouth executives who have agreed to plead guilty and await sentencing. The estimated loss could change in subsequent cases.
But Judge Johnson's 21-page decision, made public Friday, could be a setback for prosecutors in one of the most sweeping corporate corruption cases yet.
Prison terms are based in part on the value of the loss, and a lower estimated loss could mean lesser penalties for five ex-HealthSouth workers Judge Johnson will sentence next month.
Prosecutors were surprised by Judge Johnson's decision, but withheld comment.
"We will voice any objections we have to the findings in open court or in writing," said U.S. Attorney Alice Martin.
Defense lawyers either declined comment or didn't immediately return phone calls Friday.
In a hearing last week, government witnesses estimated HealthSouth shareholders had lost from about $1.7 billion to $2.8 billion based on formulas that took into account a sharp drop in stock prices and the number of outstanding shares.
The defense rejected the estimates as too high, and Judge Johnson agreed.
The judge ruled that bogus numbers inserted into accounts by the first five defendants inflated earnings by 18 cents a share, and that stockholders not connected with the fraud owned some 366 million shares. Multiplying one number by the other, Judge Johnson computed a total loss of $65.88 million.
Separately, the government has contended HealthSouth overstated earnings by $2.7 billion to match the forecasts of Wall Street analysts. Judge Johnson's ruling dealt with shareholder losses only and didn't address whether the government's figure for overstated earnings is correct.
Of the first five defendants set for sentencing Dec. 10, former assistant controller Emery Harris faces a maximum penalty of 15 years imprisonment and $1.5 million in fines.
Former corporate vice presidents Angela C. Ayers, Cathy C. Edwards and Rebecca Kay Morgan, and Virginia B. Valentine, a former assistant vice president, each face maximum sentences of five years in prison and fines of $250,000.
Defense lawyers have said they were hopeful at least some of the five could avoid prison and get probation.
Fired CEO Richard Scrushy is free on $10 million bond after pleading innocent to 85 criminal counts in the fraud. A judge has indefinitely delayed his trial, which had been set for Jan. 5.
HealthSouth stock closed at $3.50 a share Friday. The stock has regained most of its value after falling to mere pennies in March when the Securities and Exchange Commission filed suit accusing the company and Mr. Scrushy of fraud.
HealthSouth, based in Birmingham, is the largest U.S. provider of outpatient surgery, diagnostic imaging and rehabilitation services. The company has nearly 1,700 facilities in all 50 states and abroad.
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