HealthSouth Investors: Bankers, Auditors Knew About Fraud

January 8, 2004 ( - An investor group including several pension funds has filed a federal court lawsuit alleging that auditors and investment bankers were either aware of the $2.7 billion fraud at HealthSouth Corp., or looked away from clear signs of trouble.

Plaintiffs, including the Retirement Systems of Alabama, made the charges in the suit filed in US District Court in Birmingham, Alabama against UBS Warburg, HealthSouth’s ex-investment banker, and Ernst & Young LLP, the health-care firm’s former auditor, the Wall Street Journal reported. The pension funds purchased HealthSouth bonds and individual investors bought the company’s stock.

The bankers who helped generate cash and the auditors who were supposed to pore over HealthSouth’s records looking for fraud, had to have been involved to some extent, the investors charged. According to the lawsuit, “this multiyear scam could not have been, and was not, perpetrated only by HealthSouth and its insiders. Rather, HealthSouth’s outside-accounting and investment-banking firms were knowing participants in the scheme.”

Since March 2003, 15 former executives have pleaded guilty to helping carry out a fraud that artificially inflated income by $2.7 billion from 1996 to 2001. Several of those executives allege that HealthSouth founder Richard Scrushy , who was ousted as chief executive, called the shots on how the fraud was to play out. He was indicted in October on 85 criminal counts charging, among other things, that he directed the fraud. Scrushy’s trial is set for August.

Later this month, the Birmingham-based HealthSouth is expected to update investors on its financial standing. So far, the company has avoided filing for bankruptcy and has reported significant cash flow from its operations, which include inpatient and outpatient surgery and rehabilitative services.