Risk Management

HealthSouth Settles for $445 Million

By settling the class-action lawsuits, the company hopes to put its scandal-ridden past behind it.
Stephen TaubSeptember 27, 2006

HealthSouth Corp. has agreed to pay $445 million to settle several lawsuits against the health-care provider and some of its former directors and officers stemming from its accounting scandal. Under the deal, HealthSouth will shell out $215 million in common stock and warrants, and its insurance carriers will pay $230 million in cash.

Further, federal securities class-action plaintiffs will get 25 percent of any future judgments obtained by or on behalf of HealthSouth regarding certain claims against Richard Scrushy, the company’s former chief executive officer; Ernst & Young, the company’s former auditors; and UBS, the company’s former primary investment bank. Each party remains a defendant in the derivative actions and the federal securities class actions.

“This settlement represents another significant milestone in HealthSouth’s recovery and is a powerful symbol of the progress we have made as a company,” said HealthSouth president and CEO Jay Grinney. The settlement does not contain any admission of wrongdoing by HealthSouth or any other settling defendant, according to the company’s press release.

The settlement also does not include E&Y, UBS, Scrushy, or any former HealthSouth officer who entered a guilty plea or was convicted of a crime stemming from the fraud. The Associated Press pointed out that the final version of the agreement is virtually identical to a preliminary settlement reached in February.

Facing federal criminal charges and possible jail time, five former HealthSouth CFOs pleaded guilty and testified against their former boss after the scandal unraveled earlier this decade. Scrushy and several executives were accused of recording as much as $2.7 billion of fake revenues on the company’s books over six years, and correspondingly adjusting the balance sheets and paper trails.

They were charged with overestimating insurance reimbursements, fiddling with fixed-asset accounts, improperly booking capital expenses, and overbooking reserve accounts. Last year, Scrushy was acquitted of all charges linked to the massive accounting fraud. In an unrelated case, Scrushy was convicted in July for donating $500,000 to a governor’s campaign for a state lottery in return for a seat on an Alabama hospital regulatory board.