FOR IMMEDIATE
RELEASE
TUESDAY, NOVEMBER
4, 2003
WWW.USDOJ.GOV
|
CRM
(202) 514-2008
TDD (202) 514-1888
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Government Seeks More Than $278 Million in Forfeiture
WASHINGTON, D.C. – Assistant Attorney General Christopher A.
Wray of the Criminal Division, U.S. Attorney Alice H. Martin of the Northern
District of Alabama, Carmen S. Adams, Special Agent in Charge of the
FBI-Birmingham Field Office, and Internal Revenue Service Commissioner
Mark W. Everson announced today that Richard M. Scrushy, a former chief
executive officer and chairman of the board of HealthSouth Corp., has
been charged in an 85-count indictment stemming from a wide-ranging scheme
to defraud investors, the public and the U.S. government about HealthSouth’s
financial condition.
Scrushy, 51, of Birmingham, Alabama, surrendered at FBI Headquarters
in Birmingham. The case has been assigned to the Honorable Karon O. Bowdre,
U.S. District Court Judge.
The indictment was returned by a federal grand jury in Birmingham last
Wednesday and unsealed this morning. The indictment charges Scrushy with
conspiracy, mail, wire and securities fraud, false statements, false
certifications and money laundering. The indictment also seeks forfeiture
of more than $278.7 million in property which Scrushy derived from proceeds
of the alleged offenses, including several residences, boats, aircraft
and luxury automobiles. “As alleged, instead of telling the public the truth, Richard
Scrushy and his accomplices lied – they cooked HealthSouth’s
books and Scrushy personally vouched for false financial statements with
the SEC to cover up their scheme,” said Assistant Attorney General
Christopher Wray. “These charges show that the government has important
new tools to hold executives accountable for corporate fraud, and we
won’t hesitate to use them where the evidence warrants it.”
“
CEOs owe a fiduciary duty to investors, and the vast majority uphold
that duty. However, for those who do not, our message is that no executive
is above the law and through our forfeiture efforts we will work to
show that crime doesn’t pay,” stated U.S. Attorney Alice
H. Martin.
HealthSouth Corporation, founded in 1984, was the nation’s largest
provider of outpatient surgery, diagnostic imaging and rehabilitative
healthcare services, with approximately 1,800 locations in all 50 states,
Puerto Rico, the United Kingdom, Australia and Canada. Scrushy served
as chairman of the Board of Directors from 1984 through early 2003,
and as chief executive officer of the company during that time, except
for periods in late 2002 and early 2003. Scrushy and other HealthSouth
executives received salaries, bonuses, stock options and other benefits
that were tied, directly or indirectly, to the company’s financial
performance. From 1996 through 2002, Scrushy received approximately
$267 million in compensation from HealthSouth, including $7.5 million
in base salary, more than $53 million in bonuses, and stock options
valued at more than $206 million when exercised.
Scrushy controlled HealthSouth while CEO and Chairman of the Board,
and personally participated in the preparation of financial statements
and other financial documents. The indictment alleges that Scrushy
caused HealthSouth to falsify financial statements, making the company
appear more successful than it actually was.
The indictment alleges that between 1996 and 2003, internal reports
by HealthSouth’s corporate accounting staff showed that the company
routinely failed to produce sufficient net income to meet the expectations
of Wall Street securities analysts, the market and its own internal
budgets – a failure that Scrushy and others allegedly referred
to as “not making the numbers.” According to the indictment,
Scrushy and others devised a scheme to inflate HealthSouth’s
earnings by making false and fraudulent entries in HealthSouth’s
books and records, and to cover up the accounting fraud with false
financial filings and statements. The indictment alleges that the scheme
added approximately $2.7 billion in fictitious income to HealthSouth’s
books and records during the course of the conspiracy. The indictment
further alleges that Scrushy paid himself and others in the form of
salaries, bonuses and stock options as a result of the fraudulently
inflated results.
According to the indictment, Scrushy and his accomplices would meet
to discuss HealthSouth’s actual financial performance and the
need to falsify those internal results before they were publicly reported.
The indictment states that Scrushy, through his accomplices, caused
members of the corporate accounting staff to falsify the company’s
books and records. The fraud allegedly included false entries in income
statement and balance sheet accounts, including property, plant and
equipment accounts, cash accounts and accounts receivable, among others.
According to the indictment, the co-conspirators referred to those
methods as “filling the hole” or “filling the gap.”
As part of the conspiracy, Scrushy and other co-conspirators allegedly
signed and filed false statements with the Securities and Exchange
Commission, and sought to conceal the fraud by controlling the internal
distribution of actual financial results and providing false information
to federal and state tax authorities. The indictment also alleges that
Scrushy sought to control his co-conspirators, HealthSouth employees
and the company’s Board of Directors by, among other things,
threats, intimidation, electronic and telephonic surveillance, and
reading their e-mails. To further control others at HealthSouth, Scrushy
allegedly obtained large compensation packages for co-conspirators
and offered them other incentives to keep them from discussing the
fraudulent scheme, including, at one point in early 2003, an offer
to take care of a co-conspirator’s family if the co-conspirator
would take the blame for HealthSouth’s financial overstatements.
The indictment alleges that Scrushy knowingly signed false statements
to the SEC, including a false 10-Q form for the third quarter of 2002,
in violation of the recently enacted Sarbanes/Oxley law. Scrushy also
allegedly continued the scheme through false representations to HealthSouth’s
stockholders and the rest of the investing public through press releases
that misstated HealthSouth’s financial condition. In June 2000,
for example, Scrushy appeared in a HealthSouth State of the Company
videotape, stating that “we have remained committed to prudent
fiscal policy and the integrity of our balance sheet,” and boasting
that HealthSouth had an outstanding balance sheet. In early 2003, Scrushy
boasted at a company managers meeting that HealthSouth did not have
the same type of problems as WorldCom and Tyco.
The money laundering counts of the indictment allege that Scrushy knowingly
engaged in financial transactions using criminally derived property,
including the purchase of land, aircraft, boats, cars, artwork and jewelry,
among other items. The indictment seeks forfeiture of all such gains
derived from criminal activity, totaling $278,727,674.35, including:
several residences in the state of Alabama and property in Palm Beach,
Florida; a 92-foot Tarrab yacht called Chez Soiree, a 38-foot Intrepid
Walkaround watercraft and a 42-foot Lightning boat; a 1998 Cessna Caravan
675, together with amphibious floats and other equipment, and a 2001
Cessna Citation
525 aircraft; diamond jewelry; several luxury automobiles, including
a 2003 Lamborghini Murcielago, a 2000 Rolls Royce Corniche, and two 2002
Cadillac Escalades; and paintings by Pablo Picasso, Marc Chagall, Pierre-August
Renoir, among others.
If convicted of all the charges, Scrushy faces a possible maximum sentence
of 650 years in prison and more than $36 million in fines, in addition
to the forfeiture.
Carmen Adams, Special Agent in Charge of the Birmingham FBI Field Office,
stated: “The HealthSouth investigation is unprecedented in its
size and scope for the Birmingham FBI. The indictment of Mr. Scrushy
marks a great and necessary step forward in restoring the community’s
trust and confidence in its corporations and business leaders. This indictment
is the result of the tireless efforts of scores of investigators and
support personnel from the FBI, SEC, IRS and Postal Inspectors who have
followed and uncovered the evidence of a very complex scheme to defraud
and diligently moved this case forward.”
“The IRS will use its financial expertise to help the government
hold accountable those executives who engage in fraud,” said IRS
Commissioner Mark W. Everson. “Our investigation supports the Department
of Justice seizure actions against Mr. Scrushy, involving a staggering
sum of money, over a quarter of a billion dollars, which he accumulated
during a seven-year period.”
The HealthSouth investigation is continuing. The investigation is being
conducted by the FBI-Birmingham Field Office, the Internal Revenue
Service-Birmingham Division and the U.S. Postal Inspection Service.
The prosecution is being handled by U.S. Attorney Alice H. Martin and
Assistant U.S. Attorneys with the White Collar Section and Asset Forfeiture
Section of the U.S. Attorney’s Office for the Northern District
of Alabama, and the Fraud and Asset Forfeiture and Money Laundering
Sections of the Criminal Division of the Department of Justice in Washington,
D.C. The investigation is being overseen by the Corporate Fraud Task
Force, established by President Bush in July 2002 to investigate and
prosecute allegations of fraud and other illegal conduct by executives
at U.S. corporations. The Task Force is headed by Acting Deputy Attorney
General Robert McCallum.
Sixteen individuals have been charged with crimes in connection with
the HealthSouth investigation since it began in March 2003. The government
has secured 14 guilty pleas from those individuals, including former
HealthSouth Chief Financial Officers Aaron Beam, Michael Martin, William
Owens, Weston Smith, Malcolm McVay and Vice President of Finance Emery
Harris. All 14 of these defendants are cooperating with the government
in this prosecution and the ongoing investigation.
The U.S. Attorney’s Office has established a telephone line for
victims of HealthSouth to call in information, and a victims’ form
on its website, at www.usdoj.gov/usao/aln, through HealthSouth News on
the home page. The telephone hotline number is (866) 777-0912.
Members of the public are reminded that an indictment contains only charges.
A defendant is presumed innocent of the charges and it will be the government’s
burden to prove a defendant’s guilt beyond a reasonable doubt at
trial.
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03-603
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