HealthSouth Fraud Larger Than Estimate

WyomingRN · Jan 21, 2004

Tuesday January 20, 7:11 PM EST

By Jed Seltzer

NEW YORK (Reuters) - HealthSouth Corp. (HLSH) on Tuesday said its massive accounting fraud was much larger than earlier estimates and may have exceeded $4 billion.

Officials for Alvarez & Marsal, restructuring specialists hired to turn around the scandal-ridden operator of rehabilitation and surgical centers, said at a financial update meeting in New York that the total amount of fraudulent entries in HealthSouth's accounting ledgers totaled between $3.8 billion and $4.6 billion.

That compares with an estimate last July that the company would have to adjust its balance sheet downward by $2.5 billion.

But restructuring officials said on Tuesday the company expects to generate revenue of nearly $4 billion in 2004, signaling a rebound from the scandal, which led to criminal charges against 16 former executives.

Alvarez & Marsal officials believe the company will remain financially viable and healthy despite expenses and adjustments related to the scandal.

HealthSouth, based in Birmingham, Alabama, expects $650 million in 2004 earnings before interest, taxes, depreciation and amortization, or EBITDA, one measure of a company's profitability.

Bryan Prewitt, an investor who holds 205,000 shares of HealthSouth and a principal of Zimmer Park Advisors, praised the turnaround efforts since the company met cash flow forecasts and remedied a default on its convertible bonds.

However, Prewitt noted that "the euphoria got a little bit ahead of itself" regarding the share price, which closed at $5.93 on the Pink Sheets. The price is far above the 10 cent low shortly after the accounting scandal and even higher than the price before the fraud was disclosed.

"By the end of the second quarter, this company should be doing business as usual," said Guy Sansone, HealthSouth's acting chief financial officer and a partner at Alvarez & Marsal.

At that point, HealthSouth should have a new permanent management team, a restructured balance sheet and made progress in its dealings with regulators, Sansone said.

Federal accounting fraud allegations in March 2003 triggered an "adverse material change" clause that froze the company's credit line and prevented the company from repaying a convertible bond that matured on April 1, landing it in default.

Last Friday, HealthSouth said Credit Suisse First Boston arranged a $355 million loan that allowed the company to repay the defaulted bond.

HealthSouth's presentation to investors is the first since July 7, when company officials said it was likely to avoid bankruptcy, calming investors after the company and its executives were accused of accounting fraud.

HealthSouth is current on all of its payments under its borrowing agreements that cover more than $3 billion of debt.

HealthSouth, its former bankers including investment bank UBS AG (UBSN), and its former auditors Ernst & Young face a class-action lawsuit from shareholders and bondholders.

Fifteen former executives have pleaded guilty to taking part in the fraud scheme, and HealthSouth founder Richard Scrushy is facing criminal charges in the case.

Alvarez & Marsal officials said the company is working with the U.S. Centers for Medicare and Medicaid Services and the Securities and Exchange Commission, which are investigating the fraud. The company hopes to reach a large settlement with the Medicare office covering all potential wrongdoing.

HealthSouth perpetrated its fraud essentially by inflating the amount it was receiving from the Medicare program for the elderly and disabled.

HealthSouth expects to complete and submit its revised financial statements in the first quarter of 2005, which would end a long process of getting to the bottom of the real financial health of the company and the extent of the fraud. (Additional reporting by William Borden)