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HealthSouth is Created
Richard Scrushy, Aaron Beam and a number of friends decided to start HealthSouth with the help of venture capitalist Chuck Newhall. Even during the first year it was noticed that Scrushy decided to fire KPMG, and hirer Ernst and Young, because they wouldn’t comply with hist demands. -
HealthSouth goes Public
In early 1986 HealthSouth goes public and so began its need to meet shareholders demands. The Securities Exchange Commission suggests that fraud started in the accounting department this year. Anything that didn’t meet expatiations was taken to Scrushy and then simply sent back until it did. HealthSouth growth came from accumulating and building rehabilitation hospitals, outpatient rehab clinics, and diagnostic services. The picture to the left is an example of one of many clinics. -
Internal Fraud Discovered
The first internal fraud witness came forward in 1989, but was quickly fired by Scrushy. Sum suspect that fraud was not noticed earlier due to a statute of limitations that protected accounting records for five years.
Mr. Webster said when he raised concerns about what he thought were improperly booked receivables, Mr. Scrushy said, "we're under certain pressures to make certain numbers," according to Mr. Webster's testimony. "We have an obligation to stockholders and shareholders." – NY -
Harris and Lorello Relationship Bolster Stock Prices
Harris and Lorello were market analyst that hand an uncanny ability to predict the huge growth of HealthSouth. Both individuals also made large sums of money though business dealings with HealthSouth.
HealthSouth always met these predictions and used their huge growth to arrange better loans and floats. -
Birth of MedPartners
Scrushy and other members of HealthSouth created MedPartners, a Physician Management business. It was during this time that Martin, an executive in the accounting department, was approach by Scushy and told to fix the books.
``We were going to miss earnings and we had to make an acquisition to make it up,'' said Martin he said Scrushy told him to ``fix'' earnings shortfalls virtually every month during that time. ``If we weren't making the numbers he would say, `Go figure it out,''' -
Capstone is Born
Capstone, a real estate investment trust (REIT), was started by Scrushy and two partners. The business simply purchased properties from HealthSouth, Integrated Health Services, Surgical Health and Scrushy’s private Holdings and then leased them back at a profit. All three companies had Scrushy as their director.
HealthSouth became the largest provider of rehapbilitation services in the U.S. –November 5, 2003 -
HealthSouth Gobbles Up Rivals
HealthSouth acquired over 2.5 billion dollars’ worth of companies in 1995. Caremark, Nova Care, and Surgical Health are all companies purchased during this huge buying spree. During this time HealthSouth also sold Capstone for a huge profit
HealthStone paid Mr. Scrushy $1.7 million in salary and a $5 million bonus. - The Scrushy Mix: Strict and So Lenient. The New York Times April 20, 2003 -
Qui Tam Lawsuits
A number of whistleblowers came forward in relation to Medicare fraud. While all of these lawsuits lasted through 2001 none of the information has been made public. -
21st Century Health Ventures Created
21st Century Health Ventures was a private company created by Scrushy, Martin, and Hicks. Hicks later pleaded guilty to fraud in relation to 21st Century Health Ventures and its relationship to HealthSouth.
“After years of quick growth with Scrushy as CEO, HealthSouth operates in all 50 states and eventually bills itself as the nation's largest provider of diagnostic imaging, outpatient surgery and rehabilitation services.” Chronology of HealthSouth Corp. LA Times Associated Press January 24, -
Rapid Expansion and Small Cracks begin to show
HealthSouth was now considered the darling company in its market. Anything they did was seen as a smart move even buying a company being investigated for fraud. Since going public HealthSouth has been cooking the books to meet shareholders expectations. However MedPartner, a company owned by HealthSouth, was having issues with its rapid grow and lack of actual income. This caused the CFO to step down and Michael Martin, Treasurer, took over and continued fraudulent activities. -
The Beginning of the End
During their SEC report HealthSouth reported that it received a series of legal problems from its acquisition of CMS. These included everything from investigation from the State of Michigan to investigations from the New York Stock Exchange.
After a 93% drop in profits shareholders begin to see that there might be something wrong and stock prices drop significantly. Stockholders also launch class action lawsuits suggesting insider trading might be taking place inside of HealthSouth. -
Buy Backs and Sell offs
HealthSouth buys back 1 billion in stock to convince shareholders everything is alright. However, shareholders and lenders aren’t convinced and HealthSouth has to close 300 million dollars’ worth of hospitals. Medpartner also loses 1.26 billion and has to close its entire physician management business. Overall, while many people on Wall Street saw these closers as a way to stay afloat families using these facilities were simply out of luck. -
Trapped in the game
Moody’s Investors Services threatened to downgrade HealthSouth’s 3 billion dollar debt, but Scrushy responded by saying “We're doing great, . . . Our cash is great, our earnings are strong . . . and shareholder value is improving every day". Scrushy has found himself trapped in a market that expects so much of HealthSouth. -
Payment and new Titles
HealthSouth is able to raise money from the market with the increased investment from the government into Medicare. They use this new money to help pay 8.2 million in Medicare fraud from years earlier. 2001 was also the first year that Scrushy stepped down from a director position in any of the many companies he helped run. Caremark would now be led independently of HealthSouth. -
Class Action Lawsuits
During May the U.S. Department of Justice joined a whistle blower case against HealthSouth. Its not normal for the government to join these cases and indicated to the public that HealthSouth was going to have to settle for a very large amount.
“U.S. Department of Justice served the company with a complaint in connection with a pending civil suit connected with a previously disclosed civil False Claims Act case pending against the company in Texas." -
HealthSouth Shares Drop
As things began to get sticky Scrushy sells off 2.5 million in shares at $10.06 and then in the following month announces that due to changes in Medicare the company will be taking 175 million dollar hit. After the announcements investors react negatively and the price plunges to $6.71. At this point Scrushy hopes to separate the company into profitable and unprofitable sections. This would allow him to buy the unprofitable section and hide the corruption in a private company. -
Extra Wall Street Journal Quote
“Just months before an accounting scandal engulfed HealthSouth Corp., top company executives launched an endgame that might have prevented an alleged $2.5 billion fraud from ever being discovered, according to testimony in a federal court hearing in Birmingham, Ala.” - HealthSouth Corp. Planned Buyout, The Wall Street Journal April 25, 2003 -
Enron investigators target HealthSouth
Enron investigators begin to serve HealthSouth with a subpoena and begin interviewing employees immediately. Weston L. Smith, former CFO offers to make audiotapes of his colleagues which could be used in court. -
The End
The SEC and Justice Department charge the company and Scrushy with massive fraud between 99 and 03. HealthSouth’s shares drop to $4 from $30 dollars five years previously. Scrushy and Williams are put on administrative leave and many accountants begin to strike deals to lessen their penalties. This caused wide spread panic which spread to shareholders and the government had to freeze all investments in HealthSouth. -
Everyone Pleads Guilty
By the end of April 11 senior members of HealthSouth had pleaded guilty to charges of fraud. They also alleged that Scrushy was involved. The SEC wanted to pay back over 700 million, but until he was tried for the crimes he denied the government could not seize his assets. Many members who plead guilty used regulations to limit the charges to bank fraud. This allowed them to pay fines and minimal jail time compared to long jail sentences.
Many employees weren't punished due to being unaware -
Testify
Scrushy offers to testify in front of the courts if he is given full immunity. The courts rejected the offer and asked Scrushy to turn over any information he might have on employees.
“HealthSouth Corp. interim Chairman Joel Gordon said on Monday the scandal-plagued health care provider has a good chance of avoiding bankruptcy as the company expects to generate over $300 million in free cash flow.” –msnbc 2003 -
Scrushy's Fight and a New HealthSouth
Scrushy hires multiple lawyers and begins delaying the trials with pretrial paperwork. He also takes the 5th amendment and refuses to answer any questions in front of a congressional hearing. Meanwhile HealthSouth begins to pull itself together under new management. However, again are forced to change the entire board of directors after defaulting on bond payments. Overall, the company begins to live again, but high level employees were at the chopping blocks if anything seemed suspicious. -
Changes
Shares had recovered from 8 cents all the way to 6 dollars and the new HealthSouth promised to pay 355 million over 7 years. During this time Scrushy had become a fundamental Christian running his own televangelist series. -
Charges Dropped
After a long trial Scrushy was deemed not guilty on all accounts. This was due to no clear paper trail on Scrushy and the all of the key witnesses were felons. HealthSouth continued to pay back multiple accounts of fraud and fight other new accounts that began to creep up. HealthSouth was also able to resettle with the government and only bay back 770 million of its 1.4 billion dollar loan. Overall, investors had regained trust in the new board made up of doctors, lawyers, and business men. -
Closing
To pay off its entire debt balance HealthSouth sold off unprofitable assets. It also sold off Caremark to CVS which brought in a little profit. Finally Scrushy had to battle a bribery suit which he ended up losing to the tune of 71 million dollars. Overall, HealthSouth surived and while many people lost their jobs and money the people responsible were hit hard fines or even jail time.
