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The Congressional Investigation
"The Financial Collapse of HealthSouth"

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This corporate web site addresses the issues of corporate health care within a broad framework. A web page describing this broad context should be considered as an introduction to each page on the web site. If you have not yet read it then
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Content of this page
This web page describes what happened at the congressional investigation into HealthSouth's fraud and its financial collapse. There are links to transcripts at the foot of the page.



 The investigation and hearing

A congressional committee (The House Energy and Commerce panel on oversight and investigations) commenced an investigation into the HealthSouth fraud scandal towards the end of 2003. The committee is primarily concerned with determining what happened from a legislative perspective. Are there legislative changes needed to prevent these things from happening.

See links at foot of page for webcasts and transcripts.

They were interested in HealthSouth, Ernst & Young, UBS and other related groups. Scrushy and several others exercised their right to invoke the 5th Amendment to avoid incriminating themselves. Scrushy had meanwhile given a no questions barred television interview.

 HealthSouth's own early investigation into Scrushy received attention.

A congressional panel investigating a massive fraud at HealthSouth Corp. is trying to determine if ousted CEO Richard Scrushy tried to influence a law firm's review of the health care giant.
Fulbright Jaworski's five-week review last fall found no wrongdoing by Scrushy in his sale of $25 million in HealthSouth stock before a company announcement sent share prices into a freefall.
"Further, these e-mails raise troubling questions about the extent to which Mr. Scrushy, or others acting on his behalf, may have influenced the content of the reports and the scope of your investigation, both in terms of what was included in the report, as well as what may have been intentionally omitted," the letter stated. 

Fulbright twice found documents had been destroyed after HealthSouth's general counsel ordered workers to retain all papers, the letter said.
Scrushy's influence examined Associated Press September 11, 2003

Lawmakers were very critical of Scrushy's refusal to answer questions under oath, questions which he had willingly answered on national TV a few days before.  He insisted on pleading the 5th amendment. He was not the only one.

The letter (from Scrushy's lawyers) accused the committee staff of setting traps that could be sprung if Mr. Scrushy testified before prosecutors complete their criminal investigation. "All of us have seen the staff of this committee work on past hearings in conjunction with the Department of Justice to create perjury traps," it said.
HealthSouth Scandal Doesn't Slow Former Chief The New York Times September 26, 2003

 "The committee wants me to answer charges without facing my accusers. I do not believe this is fair," Scrushy said, seated at a table facing skeptical lawmakers. "I am therefore, by advice of counsel, forced to take the Fifth Amendment today, until I can get a venue where I can face my accusers."
"If what you told the public Sunday on television was the truth, why don't you repeat those answers under oath?" Greenwood asked.
HealthSouth’s founder takes 5 th before panel M.E. SPRENGELMEYER SCRIPPS HOWARD NEWS SERVICE October 17, 2003

Susan Jones-Smith, former senior vice president of finance in HealthSouth's reimbursement division, also invoked her constitutional right not to testify before the committee.

 To no avail, lawmakers pelted Scrushy with questions and excoriated him for refusing to answer their questions even though he responded to similar questions in an interview aired Sunday by CBS News' 60 Minutes program.
Ex-HealthSouth CEO mum, employees felt intimidated USA Today (Reuters) October 16, 2003

Others from the company gave evidence. Much of this was repeated at Scrushy's trial. More people including directors, auditors and bankers gave evidence. The description of what happened is similar to the evidence given at Scrushy's trial but many more testified that Scrushy was the person behind the fraud. The congressmen never challenged this. I will not repeat all the evidence here.

But several former and current HealthSouth employees did talk at the hearing, describing lax internal controls and said they felt intimidated by senior executives at the company.
 A former HealthSouth physical therapist, Steve Schlatter, said he was warned against going to the company's compliance office to air concerns that the company was overbilling Medicare.

"I had a supervisor tell me quite frankly that I didn't want to go there," Schlatter said. "They would make my life miserable."
Ex-HealthSouth CEO mum, employees felt intimidated USA Today (Reuters) October 16, 2003

 But several current and former HealthSouth employees testified that Scrushy knew about the massaging of company accounts to meet Wall Street's earnings forecasts. They described an atmosphere of intimidation in which high-ranking executives didn't want to hear bad news and employees feared retaliation by their bosses.
Ousted HealthSouth Chief Invokes Fifth The Miami Herald (Associated Press) Oct. 16, 2003

 Most of yesterday's hearing focused on the claims of half a dozen former HealthSouth employees who say they tried internally to report alleged fraud beginning in the late 1990s but that they were routinely rebuffed by their superiors.
HealthSouth's Ex-CEO Takes the Fifth : Scrushy Won't Repeat Denial Made on TV Washington Post October 17, 2003

Directors, auditors and bankers all attempted to distance themselves from the fraud and blame someone else. The lawmakers were incredulous.

 May and other HealthSouth directors, who approved lavish compensation for Scrushy while shareholders suffered huge losses as the company's stock plummeted, insisted they were kept in the dark about accounting abuses by the outside auditors, Ernst & Young. Lawmakers questioned them about Scrushy's treatment of directors and employees and other seemingly bizarre practices, such as costly auditor reviews of the company's toilet facilities.
 James Lamphron, one of the Ernst & Young auditors responsible for the HealthSouth account, said it was HealthSouth executives who kept them from getting a full picture of the company's finances.

 "We were getting fake documents, altered documents; and we were lied to, over and over again," he testified.

Lawmakers received the sworn testimony of Lamphron and fellow auditors with skepticism. They repeatedly pointed to a memo by a disgruntled shareholder alerting the Ernst & Young auditors five years ago to apparent accounting violations.
 "We had numerous controls and systems in place that should have helped to detect this fraud," Givens (board member) told the panel. "Unfortunately, when high-level management conspires to commit a criminal act, I do not know of any corporate governance policy that would prevent such criminal behavior."
Acting HealthSouth chief executive acknowledges that Scrushy had investigator check him out (Associated Press) November 5, 2003

 "In this sea of fraud ... is it possible that the board of directors and the accounting firm knew nothing about this? Did they exercise their fiduciary responsibility?" asked Florida Republican Rep. Cliff Stearns at a public hearing.
"There was a stink coming out of HealthSouth's books," Tauzin said. "Some responsible people raised warnings, only to be rebuffed and ignored. Others lined their pockets as if nothing was wrong, while ... investors lost their savings."
Tauzin said E&Y's independence may have been compromised by the rich revenues it gained from doing other jobs for HealthSouth, including "making sure bathrooms were clean."
Congress Grills HealthSouth Directors, Advisers Reuters November 5, 2003

 In prepared remarks to be delivered to a congressional committee, Joel Gordon (new chairman) said Richard Scrushy, who was indicted on Tuesday on 85 criminal counts, "along with former members of management, directed a massive accounting fraud at HealthSouth."
HealthSouth Interim Chair Says Ex-CEO Led Fraud Reuters November 5, 2003

Lawmakers received with skepticism the sworn testimony of directors, auditors, investment bankers and attorneys for the company. They repeatedly pointed to a memo by a disgruntled shareholder that alerted Ernst & Young's auditors five years ago to apparent accounting violations.
HealthSouth management engaged in an elaborate conspiracy to hide the truth from auditors, investment bankers at UBS Warburg and others, said Benjamin Lorello (UBS banker dealing with HealthSouth), head of the Wall Street firm's global health care finance group.
Skepticism at HealthSouth hearing : Directors, outside auditors attempt to deflect blame Associated Press November 6, 2003

"There has never been a transaction that Mr. Scrushy was involved in when he didn't have inside information," he (Robert May, the acting chief executive) said.
Associates of Former HealthSouth Chief Deny Knowledge of Fraud New York Times November 6, 2003

The House Energy and Commerce panel on oversight and investigations accused directors and advisers to HealthSouth of compromising their independence by doing consulting work for the company, going into investment deals with it and failing to thoroughly probe allegations of misconduct made by whistle-blowers.
Rep. Diana DeGette (D-Colo.) took Ernst to task for collecting more than $1 million a year for inspecting HealthSouth facilities, including toilet areas, for cleanliness at the same time it was supposed to independently review the company's books.

Investment bankers at UBS Warburg, who had worked closely with HealthSouth's management for some 15 years, also faced questions about how their due diligence into the company's financial health never turned up evidence of serious trouble. Benjamin D. Lorello, a UBS managing director, said the firm relied on HealthSouth's audited financial statements.
HealthSouth Advisers Rebuked : Lawmakers Fault Consulting Work, Other Conflicts Washington Post November 6, 2003

Details of Evidence

For more information, webcasts and transcripts of proceedings and evidence from "The Financial Collapse of HealthSouth" go to the House Energy and Commerce panel on oversight and investigations at

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Web Page History
This page first created Oct 2007 by
Michael Wynne