HealthSouth scandal: Signs of Trouble
The first sign of accounting problems arose in late 2002. Scrushy sold $75 million of HealthSouth stock several days before the company announced a large loss. This was on top of the 7.7 million shares that he had sold for $77 million between 1999 and 2001. The Securities and Exchange Commission (SEC) began to investigate whether this sale was related to the loss, which would have violated insider trading laws. HealthSouth chief financial officer William Owens became a government informant, recording his conversations with Scrushy to provide evidence for the government’s case. In one recorded conversation, Scrushy told Owens that he would “get killed” if he fixed the financial statements immediately, but that the problems could easily be dealt with over time.
On March 19, 2003, the SEC halted trading of HealthSouth on the New York Stock Exchange, charging that the company inflated its earnings by more than 10 percent and overstated its profits by nearly $2.5 billion between 1999 and 2002. The company was also removed from the Standard and Poor’s 500 index. After trading as high as $30.81 in 1998, HealthSouth fell to $3.91 per share when trading was halted. One week later, Owens pleaded guilty to doctoring the company’s financial statements.
On March 31, the board of directors fired Scrushy and Owens, as well as its auditor, Ernst & Young. They removed Scrushy’s name from the company conference center and hired the restructuring firm Alvarez & Marsal to put the company finances in order and help it avoid bankruptcy. To restore profitability, HealthSouth sold or closed its poorly performing facilities, including its surgery, outpatient, and diagnostic divisions. By late 2006, HealthSouth had completed its recovery, becoming primarily a provider of rehabilitation services, and was relisted on the New York Stock Exchange.