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After Fraud, HealthSouth Reaches $445M Settlement With Investors

By Kyle Whitmire


HealthSouth, which runs a chain of outpatient rehabilitation hospitals, said on Thursday that it had agreed to pay $445 million to settle investor lawsuits filed after federal investigators uncovered accounting fraud at the company.

Under the terms of the agreement, which is subject to approval by the federal judge overseeing the case, HealthSouth’s insurance carriers will pay stockholders and bondholders $230 million in cash. The company will pay the remaining $215 million with common stock and warrants.

In addition, the plaintiffs will receive 25 percent of any future judgments the company receives from Richard M. Scrushy, its former chief executive; Ernst & Young, its former auditor; and UBS, its former investment bank. The company admits no wrongdoing, and all executives who have not pleaded guilty or been accused of a crime are freed from liability.

“This proposed settlement represents a major milestone in HealthSouth’s recovery and a powerful symbol of the progress we have made as a company,” HealthSouth’s chief executive, Jay Grinney, said in a statement Thursday.

In March 2003, federal investigators raided HealthSouth’s headquarters here and exposed what was then estimated to be a $2.7 billion accounting fraud. More recent restatements have estimated the fraud to be in excess of $4 billion.

After the fraud was exposed, 15 HealthSouth executives pleaded guilty to criminal charges, including all five of the company’s chief financial officers. One former financial executive, Hannibal Crumpler, known as Sonny, was found guilty at trial.

In June 2005, a jury in Birmingham acquitted Scrushy of all criminal charges that he participated in the fraud. He still faces numerous civil suits in the case.

The New York Stock Exchange delisted the company and the stock plummeted to a low of 8 cents a share in the spring of 2003. For almost a year, the company teetered on the brink of bankruptcy as it negotiated with creditors and replaced nearly all of its senior executives and board members.

HealthSouth’s stock price rose 8.4 percent on Thursday, to $5.31 a share, a level it reached just before the fraud became public in 2003.

The settlement is another costly step for the company in its long climb toward recovery. In June 2005 it settled a lawsuit by the Securities and Exchange Commission for $100 million. Other costs, including forensic audits and restatement costs, have totaled more than $479 million, according to figures provided by HealthSouth.

Late last year, the company filed a final restatement, and in December it held its first shareholders’ meeting since the fraud was exposed. At that meeting, Grinney, the chief executive, told investors the company had completed the first year of a three- to four-year process of “paying for the sins of the past” and that HealthSouth would make its future filings with the SEC on time.

“With the support of our dedicated employees across the country, HealthSouth is on the verge of putting another issue from the past behind us,” Grinney said Thursday.