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Beleaguered HealthSouth says it's under SEC scrutiny

Compiled from Times wires
© St. Petersburg Times
published September 20, 2002

HealthSouth Corp. said Thursday that it is being investigated by the Securities and Exchange Commission in the wake of recent disclosures that its earnings would be sharply lower than expected and that its founder and chairman, Richard Scrushy, had sold half his stake in the firm a few weeks before the profit warning.

The earnings announcement on Aug. 27 sent its share price skidding 44 percent lower that day.

The Birmingham, Ala., company, which operates rehabilitation hospitals and clinics around the country, did not specify which areas the SEC would be looking at, but told investors during a conference call Thursday that it would cooperate fully.

SEC spokesman John Heine refused to confirm the inquiry.

Caught in the glare of post-Enron scrutiny, HealthSouth is facing questions about its financial practices and insider stock sales.

"We have been subjected to misleading and inaccurate press reports," Scrushy said during the conference call. He said the company has strong cash flow and high revenues, and he dismissed class-action lawsuits from investors as frivolous.

In trading on the New York Stock Exchange, HealthSouth shares fell 26.7 percent, or $1.11 a share, to close Thursday at $3.05.

HealthSouth is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services, with about 1,900 locations in all 50 states, Britain, Australia, Puerto Rico and Canada. It operates 11 rehab centers in the Tampa Bay area, as well as outpatient surgery centers in Tampa and St. Petersburg.

On Aug. 27, HealthSouth announced it was reducing its earnings estimates by $175-million based on a clarification of a Medicare billing policy, which was issued May 17. The announcement also said Scrushy would be replaced as chief executive by president Bill Owens, but would continue as chairman of HealthSouth and a new surgery center company being spun off by the firm.

This month, it was disclosed in an SEC filing that Scrushy sold about $25-million worth of stock -- half his stake in the company -- on July 31.

Lawsuits have been filed against Scrushy and HealthSouth executives that question the timing of the insider stock sale and whether information was kept from shareholders who lost some $2.7-billion in value in the initial price plunge.

One issue in the shareholder lawsuits is whether Scrushy knew how much impact Medicare's policy would have on HealthSouth when he sold his shares.

Scrushy said Thursday that the company did not have any indication as to the impact the Medicare policy change would have on earnings until Aug. 15, and that he sold back the stock shares July 31 to pay off a loan from the company in an overall effort to reduce HealthSouth's debt load.

Jeff Goldsmith, a hospital consultant based in Richmond, Va., said he was skeptical of the company's account of its problems with Medicare. "The idea that the company, the acknowledged expert on rehabilitation, would be surprised by something that happened several years ago is just not credible," he said.

-- Information from the Associated Press, New York Times and Times files was used in this report.

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