Administration September 9, 2003

Louisiana Retirement System Sticks HealthSouth With Lawsuit

September 9, 2003 (PLANSPONSOR.com) - Pointing to a long list of accusations of self-dealing transactions and corporate governance lapses, the Teachers' Retirement System of Louisiana has filed a lawsuit against the directors of HealthSouth Corp.
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The Louisiana pension fund, which held 69,400 shares in HealthSouth as of September 3, brought 21 separate claims against HealthSouth’s board, the company’s outside auditor – Ernst & Young – and the company’s lead investment bank – UBS Warburg.   Included in the charges is a failure to disclose a number of related-party transactions between various companies and HealthSouth directors and a breach of fiduciary duties, according to Wilmington, Delaware-based securities law firm of Grant & Eisenhofer, a representative of the retirement system.

With the action, the retirement system seeks to compel the board to disgorge profits obtained during these transactions, and to hold a shareholder meeting so that a new board of directors can be selected.   According to the retirement system, a shareholder meeting has not been held at the embattled hospital operator since May 2002.

“We have brought this lawsuit to compel HealthSouth Corp. to hold an election of its board of directors,” said William Reeves, general counsel of the retirement system.  “We think it’s outrageous that all of the directors who had watch over HealthSouth while the company engaged in large-scale financial fraud are still in place.  Other companies embroiled in these kinds of allegations have replaced their entire boards, while HealthSouth has not even held a meeting of its shareholders since May 2002, 16 months ago.  This refusal to hold a shareholder meeting violates Delaware law, which requires a shareholder meeting at least once every 13 months.  We believe that it is time for investors in HealthSouth to take action.”

HealthSouth Suits

In addition to action taken by the Louisiana retirement system, HealthSouth has faced a number of lawsuits from other sources as well.    In June, A federal judge in Birmingham, Alabama has named theRetirement Systems of Alabama (RSA)as the lead plaintiff in suits filed by bondholders against HealthSouth.   David Bronner, RSA chief executive officer, asked for the position in April, listing his fund’s HealthSouth losses at more than $18 million amid a fraud the government contends totaled some $2.5 billion (See Bronner: Make RSA Lead HealthSouth Plaintiff ).

Earlier in the year, a group of HealthSouth workers filed suit against former Chief Executive Richard Scrushy and two other trustees of the company’s employee stock ownership plan (ESOP) for violating their fiduciary obligations.   That lawsuit claims the three defendants breached their legal duties by knowingly overstating HealthSouth’s financial statements (See  HealthSouth Participants Sue ESOP Trustees )

Louisiana’s Earlier Actions

The Louisiana retirement system has been an active player in recent corporate governance actions.   Last month, the system reached a settlement with Siebel Systems over alleged excessive executive compensation after t he retirement system accused the company directors of violating company rules for granting options, both by exceeding the cap set on the number of options it was allowed to grant, and in some cases issuing options at below market value without expensing the difference in price (See Siebel Systems Could Face Punitive Damages For Option Fiasco ).

In the settlement, the San Mateo, California-based company agreed to initiate a broad range of corporate governance changes regarding executive and board-level compensation (See  Siebel Corporate Reforms Set in Pension Fund Suit Settlement ).   Under the settlement, Siebel agreed to:

  • add a new director to its board at the company’s next shareholder meeting and create and disclose more specific selection criteria for its board members
  • increase the size of the compensation committee and limit it to independent directors
  • expand the nominating and corporate governance committees
  • limit the compensation of its directors to a pre-set level it will disclose in advance to shareholders and also disclose in advance the date on which directors will receive stock options
  • disclose annually the value of options granted to directors and the company’s five highest-paid employees.

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