HealthSouth Participants Sue ESOP Trustees

April 8, 2003 ( - A group of HealthSouth Corp. workers has sued former Chief Executive Richard Scrushy and two other trustees of the company's employee stock ownership plan (ESOP) for violating their fiduciary obligations.

The lawsuit claims that Scrushy, former chief financial officer William Owens and Senior Vice President Brandon Hale, breached their legal duties by knowingly overstating HealthSouth’s financial statements, according to Hagens Berman, the law firm representing the employees.   The accounting fraud rendered the stock an inappropriate investment for the retirement plan.   The law firm is co-lead counsel to recover losses from Enron employees’ retirement funds.

The federal government has accused the Birmingham, Alabama-based firm of overstating earnings by at least $1.4 billion since 1996 to make it appear the company was meeting Wall Street forecasts.   HealthSouth, the largest US operator of outpatient surgical centers, last week fired Scrushy and voided his employment contract (including severance).   Scrushy’s lawyers say he is innocent of the charges.  

Truth Telling

According to the suit, while Scrushy withheld truthful information regarding the company to ESOP participants, he sold or disposed of more than 7.7 million shares of HealthSouth common stock for more than $99 million.

The suit estimates that 3 million shares had been allocated to the ESOP, with a value as high as $30/share.   The stock closed at 14 cents/share yesterday.   The suit asks the court to restore to the plan the losses suffered from the breaches of fiduciary duty, the law firm said.

The lawsuit, filed in the US District Court in Birmingham, seeks to represent all HealthSouth employees who participated in the employee stock ownership plan from January 1, 1999, to the present.   The suit was filed on behalf of HealthSouth employees and plan participants Laurie Hunter, Luke Hunter, Nelda Fields, Phillip Colley, and Samuel Jackson, Jr.

Meanwhile, Owens, 44,  plead guilty to filing false certification of financial information with the US Securities and Exchange Commission.   Additionally, last Thursday five more HealthSouth executives (Including chief information officer Kenneth Livesay, 42, and four women, three of whom are now corporate vice presidents) were fired.   The executives allegedly agreed earlier in their careers to enter false numbers in accounts on a temporary basis, agreed to plead guilty in the alleged accounting fraud.