The many extracts on these pages are from copyright material. They are owned by the reference given or its owner. They are reproduced here for educational purposes and to stimulate public debate about the provision of health and aged care. I consider this to be "fair use" in the common interest. They should not be reproduced for commercial purposes.

Every attempt is made to provide accurate and well written material. Your contributions, suggestions, additional information and advice sent to the web address at the foot of the page are welcome. Where possible they will be included in revised pages.

The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made. Material contained here represents my views based on my study of the operation of the health care marketplace and the material available to me. It should not be assumed to represent the views of any other individual or organization.

Links to Site Maps

Corporate Practices

Path to this page
Home Page
US Corporate page
HealthSouth Overview

US Hospital Companies


US Aged Care

Aged care entry
Aged overview

Managed Care
Citigroup (financiers)

HealthSouth Pages I

HealthSouth's Problems

Accounting fraud
Medicare Fraud
Care of patients
Australian operations

HealthSouth Pages II

Investigations and trials
Congress investigates
Scrushy's fraud trial
Scrushy's bribery trial
HealthSouth staff
HealthSouth court actions

The Business
HealthSouth's recovery

USA section 

HealthSouth's Relationships

Introductory page
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
CLICK HERE to open it in another tab or web page.

Content of this page
This page deals with HealthSouth's board and the way it was run, with some of the complex of interrelated companies, and with directors, insider trading and political donations.


Sept. 2002
A spokeswoman for HealthSouth said "the company is committed to transparency and will address any and all allegations fully" at the conference call today. She added that the company was taking steps to ensure that it meets the highest standards of corporate governance
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

- - - - engaging in a string of questionable business deals long before the SEC came to town.
"With HealthSouth, you just never knew where the line was between what was the CEO's and what was the company's," said Doug Jones, a former federal prosecutor who is suing the company on behalf of shareholders. "That line just blurred and blurred."

The board provided little oversight. Directors often participated in Scrushy's outside ventures, and some had lucrative relationships with HealthSouth. Director Larry Striplin's Birmingham glass company repaired damage to HealthSouth clinics and won a $5.6 million contract to supply contractors building a new company hospital on U.S. 280.
He (Scrushy) founded or helped direct at least four health care companies that wound up foundering or have had recent trouble, costing investors billions in losses.

Rocket-like Ascent Tumbles Back With Crushed Investors The Birmingham News April 13, 2003


to contents


While there have as yet been no proof of criminal behaviour outside HealthSouth itself there has been a great deal of concern about its board, its corporate governance, and its dealings with others. There has been concern about the nature of the relationships between linked companies, between directors, and with auditors and banks. The appropriateness of many of the arrangements and dealings is questioned. This page examines these matters and provides links to those not addressed fully on this page.

A US government committee investigated HealthSouth's disturbing relationships with auditors and banks and multiple parties are still suing them for damages. These relationships are not dissimilar to those which led to a US $1.4 billion bank settlement by multiple banks, the disbarment of several analysts and extensive regulation during 2002. This was part of the and Enron scandals. HealthSouth's dealings with banks and analysts are addressed on another web page

HealthSouth's close relationships and partnerships with doctors are also addressed elsewhere

HealthSouth is now confronting a loss of faith on many fronts. Caught squarely in the glare of post- Enron scrutiny, the company is facing questions not just about the quality of its services, but about its financial practices, insider stock sales, business dealings among company officials and the independence of the board.
The company has also disclosed in proxy statements and other filings over the years the outlines of a number of insider deals.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

to contents

The Board


HealthSouth was founded by Richard Scrushy and a few close associates in 1984. One of them Charles W. Newhall III, cofounder of venture capital New Enterprise Associates put up the capital. Another Venture capitalist C Sage Givens in 1985. When the company went public in 1986 this pattern of closely linked long term directors were maintained.

When things started to come undone in 2002 one of the first things to cause alarm was problems in corporate governance and the absence of any truly independent directors. Particularly worrying was the web of links, business arrangements, investments and directorships tying the directors to HealthSouth and to the web of companies to which it was linked and with which it did business. There were far too many conflicts of interest for directors. When HealthSouth tried to find outside directors they initially found few willing to join the enclave and the only one who did promptly resigned.

"The board of directors at HealthSouth appears to have done little if anything to reign in CEO Richard Scrushy stop him from doing certain things and there was a pattern that went on here many, many years that appears to have been defrauding investors unbeknownst to shareholders and the auditors and the board of directors, so in that way it's similar to WorldCom and Enron," Faber said.
HealthSouth Woes Could Burn Holes In Shareholders' Pockets - MARCH 19, 2003

Richard Scrushy faced a rebellion of almost half HealthSouth's shareholders as far back as last October, nearly 7 months before he was accused of a $1.4bn accounting fraud at the US hospital operator.

Investors pressed Mr Scrushy, HealthSouth's founder and chairman, in a conference call about a lack of independence on the board and complicated financial relationships between the group, its executives and companies in which they had an interest.
Investors worried about HealthSouth Financial Times April 15, 2003

Critics claim that HealthSouth's board was controlled by Scrushy's cronies, who lavished Scrushy with high pay and did not provide much oversight.

- - - - -, HealthSouth was facing pressure to reform its corporate governance and add independent directors, since five of its directors were on the board since the mid-1980s.
Healthsouth CEO, CFO Placed on Leave Reuters 20 Mar 2003

Around the same time, investors and shareholder activists began criticizing Mr. Scrushy's management style and what they called his overly close relationship to the company's board. Over the years, shareholders had complained that HealthSouth was run like a personal fief of Mr. Scrushy, with many investments in ventures that stood to be profitable for him and other executives and directors. Few directors appeared to question Mr. Scrushy or any of his decisions, shareholders complained.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 24, 2003

The committee (House Energy and Commerce Committee) wants to explore the following areas:
* The business relationships that existed between some board members and HealthSouth. Several board members were investors in companies that HealthSouth bought or did business with.

"Some of these financial dealings between board members raise serious questions," said investigations subcommittee Chairman James Greenwood, R-Pa. "I can't wait to hear what these guys say under oath. Whose interests were they looking after, their own or the shareholders'?"
House joins Justice, SEC in HealthSouth scrutiny USA Today4/23/2003

HealthSouth Corp., which is accused by federal regulators of accounting fraud, said Monday that a director resigned after serving on the board less than a month and warned that its past financial statements should not be relied upon.
The director who resigned Monday, Betsy Atkins, was the first one recruited by the company's governance advisory panel, aimed at restoring credibility with investors.
Atkins joined the board March 7 and was named to head the committee to investigate the Securities and Exchange Commission's allegations of accounting fraud.
Newest director quits board post at HealthSouth Chicago Tribune March 25, 2003

The removal of Mr. Scrushy, who was placed on administrative leave last Thursday, removed a major impediment in the search for board candidates, people with knowledge of the search said.
More Charges Expected in HealthSouth Inquiry New York Times March 25, 2003

Meanwhile, the HealthSouth board has been deadlocked 4-to4 as directors with longstanding ties to Mr. Scrushy refused to approve a plan to add independent members who would form a majority, according to people who have been working with the board on corporate governance issues. The holdouts, according to these sources, included three investors, George H. Strong, C. Sage Givens, Charles W. Newhall III and Larry D. Striplin Jr. a friend of Mr. Scrushy with business ties to the company.
HealthSouth Inquiry Looks for Accounts Held Offshore The New York Times March 31, 2003

The directors also said HealthSouth was having difficulty recruiting a new chief executive and new board members, although they emphasized that they were actively interviewing potential candidates.
HealthSouth Case Expands The New York Times April 9, 2003

to contents

Linked Companies

While press reports say that all board directors and executives with dual relationships have since left Caremark Rx, other HealthSouth-spawned companies with the same type of governance crossover and executive profitability are coming to light daily - Capstone Capital Corp., Marin Inc., GG Enterprises, Source Medical Solutions, and HealthTronic Surgical Center, to name a few.
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

Scrushy and his associated held directorships and owned stock in a host of companies, funded by HealthSouth, doing business with HealthSouth or subsequently purchased by HealthSouth. Some of these were Scrushy's private companies. The appropriateness of much of this has been questioned, particularly whether any of this was for the benefit of shareholders rather than Scrushy and his group.

"All facets relating to Mr. Scrushy are being looked at at this point," Mr. Dahle (from the SEC) said, including "whatever outside interests he might have had and whatever his actions may been as chairman of HealthSouth."
HealthSouth Inquiry Looks for Accounts Held Offshore The New York Times March 31, 2003

to contents

MedPartners and Caremark

MedPartners was founded in 1993 to capitalise on the craze to corporatise the management of doctors and so prey on their practices. HealthSouth put up the capital to fund the company and also supplied the founding directors and the chairman, Larry House. Caremark was a company spun off from Baxter and bruised by a fraud investigation which had resulted in a very large fraud settlement. MedPartners acquired Caremark in 1995.

Medpartners was a bubble company which initially enjoyed enormous success and shareholder support. It collapsed spectacularly in 1998 and shareholders lost heavily. It abandoned practice management and concentrated on its Caremark pharmacology business. It changed its name to Caremark and still operates under that name today. Scrushy sold his shares in 2000 and resigned in 2001. The company now distances itself from HealthSouth.

To a degree, House is trying to do with physicians what Richard Scott of Columbia/HCA Healthcare Corp. is doing with hospitals: create a national, brand-name, profit-driven delivery system.

The article, "Vulgarians at the Gate," (Fortune magazine June 1999) described MedPartners as "a onetime Wall Street darling that has cost investors billions."
Scrushy hand-picked House, then chief operating officer of HealthSouth, to run MedPartners and placed himself on the board of directors.

While House is credited for building the company to its Fortune 500 status, albeit on the back of Scrushy, he is clearly blamed for turning the "promising enterprise into one of 1998's biggest Wall Street fiascoes."

The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

The tortuous MedPartners and Caremark saga is fully described on another web page.


to contents

Integrated Health Services (IHS)

Integrated Health Services was a nursing home company founded by Dr Robert Elkins in 1986 soon after HealthSouth. It operated nursing homes and built its vast growth empire on post acute care. Elkins behaved much like Scrushy and rewarded himself lavishly. He was notorious for his political dealings and donations. The bubble finally burst when the government cracked down on the exploitation of Medicare in 1998. The company entered bankruptcy and Elkins was forced out.

In 2001 when I wrote the IHS pages I did not realise how closely HealthSouth and Scrushy were linked to IHS.

Scrushy, Strong, Crawford, and Newhall were all at one time or another directors of HealthSouth and IHS. They were also directors of some of the other HealthSouth related companies. In 1997 HealthSouth acquired Horizon/CMS keeping the rehabilitation facilities and selling the rest to IHS.

Capstone was founded by Scrushy as a REIT which supposedly freed up capital by buying facilities from HealthSouth, IHS and other Scrushy related companies then leased them back. It worked more like a money machine for Scrushy and friends. Elkins received options on Capstone shares but it is not clear if he was a director.

Mr. Strong (director and chairman of HealthSouth audit committee), a retired healthcare executive, has been a director (of IHS) since 1994 and was a consultant to the company from 1987 to 1994. - - - Mr. Crawford, Chairman and CEO of Caremark Rx (and previously HealthSouth), has been a director since 1995 - --
Two Directors Resign From IHS Board of Directors PR Newswire October 8, 1999, Friday

Charles W. Newhall III is a general partner and founder of New Enterprise Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged in the venture capital business since 1978. Mr. Newhall is also a director of Integrated Health Services, Inc., MedPartners, Inc. and Opta Food Ingredients, Inc., all of which are publicly-traded corporations.
HealthSouth SEC reports HRC directors 31 March 1998

Robert N. Elkins, chief executive of Integrated Health Services, the acute-care provider that sold properties to Capstone and on whose board Mr. Scrushy served, received options on 5,000 Capstone shares.
Scrushy Ran HealthSouth Real Estate on the Side The New York Times April 14, 2003

There are several pages on this web site dealing with IHS.


to contents

Capstone Capital Corporation

Capstone seems to be an example of the sort of businesses which Scrushy and his close associates at HealthSouth are alleged to have spawned in order to enrich themselves. These dealings were investigated by the SEC and by a government committee. They did not result in criminal or civil actions.

Background:- Many of the growth companies in health and aged care have raised some of the capital needed for growth by establishing a separate Real Estate Investment Trust company (REIT) which buys their facilities and then leases them back to the parent company. The parent company gains capital for expansion but needs a higher income stream to pay for the leases. This puts more pressure on patient care by demanding larger profits.

An additional consequence is that the original company moves its assets into a safe haven. If the asset poor service company goes bankrupt then the financiers and senior officers can simply move their money into a new company and lease those facilities again. The founders of companies can protect themselves in this way. The shareholders of the service company are left to carry the losses.

Capstone:- The concern about the REIT Capstone is that it was not really this sort of company. The concerns are that it was simply a means of enriching Scrushy and his close colleagues.

Scrushy and two partners John W. McRoberts and
Michael D. Martin created Capstone in 1994 then sold it in 1998. They profited handsomely by buying stock cheaply before it was floated on the market and by selling facilities they owned personally to the REIT. Both partners had been bankers at AmSouth. Martin had also been Chief Financial Officer at HealthSouth. He is among those who pleaded guilty to fraud. Martin became a director of Capstone and McRoberts chief executive.

Of the properties purchased 44% came from HealthSouth, 16% from Integrated Health Services, 8% from Surgical Health, and 17.7% from Scrushy and his partners. Mr Scrushy was a director of all these companies. HealthSouth purchased Surgical Health in 1995.

The three founders and HealthSouth purchased founders stock which increased in value by a factor of 18000 soon after the company went public

Name - Number of shares - Purchase Price - 3 months after float $18/share
Scrushy . . . . 82.656 . . . . . . $83 . . . . . . . . . . $1.5 million
McRoberts . .18,000 . . . . . . . $18 . . . . . . . . . $324,000
Martin . . . . . 8,064 . . . . . . . . $8 . . . . . . . . . . $145,152
HealthSouth 71,280 . . . . . . . . . . . . . . . . . . . . $1.28 million

The press extracts indicate that the three directors also received large dividends and options as well as fat fees for services they provided.

The initial offering as well as four subsequent offerings and the sale of the business were managed by Smith Barney which had recently purchased 1.2 million shares (7% of stock). Mr Lorello was the banker at Smith Barney whose analyst gave up-beat reports on HealthSouth's business activities while Lorello did vast quantities of business with HealthSouth. He appeared before an investigating government committee. For more information about the relationship between HealthSouth and Mr Lorello <CLICK HERE>.

Seven years earlier, HealthSouth, based in Birmingham, Ala., sold some of its properties to Capstone Capital, which was founded by Mr. Scrushy. HealthSouth then leased back the properties for $7 million a year. Capstone was later sold.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

- - - Capstone Capital Corporation, a publicly traded real estate investment trust that invested in hospitals, outpatient centers and other health care properties, most of which had been owned by HealthSouth and other companies associated with Mr. Scrushy.
The closeness of Capstone and Mr. Scrushy's other companies seems emblematic of the way Mr. Scrushy orchestrated deals among the many entities related to his HealthSouth empire.

Between June 1994, - - -and October 1998, - - - , Mr. Scrushy made more than $5 million as a Capstone founder and director, according to company filings. He made roughly $3.5 million in gains on Capstone shares he owned, with $1.5 million of that coming from shares for which he paid less than $83. He also received $1.3 million in dividends on those shares and $500,000 in consulting fees paid by the company.

Mr. Scrushy and his founding partners also shared a $1,675,000 payment from Capstone shareholders for helping the company become a publicly traded entity. And Mr. Scrushy and his partners sold a health care property they owned - - - - to Capstone for $20.4 million,
Capstone, - - - appears to have been created as a financing vehicle for Mr. Scrushy and companies he either ran, owned or served as a member of the board. At its inception, 86 percent of Capstone's $115 million portfolio consisted of properties purchased from four companies linked to Mr. Scrushy.

- - - HealthSouth, which sold 10 facilities to the REIT for $50.9 million. - - - According to filings, Capstone paid $3.15 million less than the properties' appraised value.
As is typical in such REITS, after the properties are purchased, they are leased back to the seller. Such transactions permit companies like HealthSouth to rid their operations of low-return real estate assets, and free them from tying up capital.
Each year, directors also received options on Capstone shares. And the year before the REIT was acquired by Healthcare Realty Trust, directors received restricted stock as well.

- - - - At the time of Capstone's initial public offering, for example, Mr. Scrushy received options on 73,000 shares and Mr. Martin received options on 55,000. Robert N. Elkins, chief executive of Integrated Health Services, - - - - , received options on 5,000 Capstone shares. All the options carried an exercise price of $18.

By February 1995, the price of Capstone's shares had fallen. Its board decided to reduce the price of the options it had granted from $18 to $16.50 even though repricing options in this manner is frowned upon by outside shareholders who do not get the opportunity to eliminate losses in their holdings.

Mr. Scrushy and Mr. Martin also got annual payments from Capstone for consulting services the directors provided to the REIT. The annual payments ranged from $60,000 to $200,000 for Mr. Scrushy and $40,000 to $125,000 for Mr. Martin.

As chief executive of the REIT, Mr. McRoberts received a salary and bonus of $407,600 in 1995. The following year, he received $531,000, and the year before the REIT was acquired, he received a salary and bonus of $625,000 and a restricted stock award worth $2.4 million.

Because they were all shareholders of Capstone, the three founders also received cash dividends every quarter. During the four years the company was public, Mr. Scrushy received dividends of $1.3 million. Mr. McRoberts received $280,000 in dividends while Mr. Martin received approximately $205,000.

Between the annual option grants and the restricted shares Mr. Scrushy received, he had amassed 234,000 Capstone shares and 158,000 options by 1998. Then, in June of that year, Healthcare Realty announced that it was purchasing Capstone in a stock-for-stock deal valued at around $800 million. Salomon Smith Barney, which in February 1998 had purchased 1.2 million shares of Capstone, or 7 percent of its outstanding stock, advised Capstone on the deal.

The purchase of Capstone gave Mr. Martin an estimated gain of $870,000 on his shares and options. Mr. McRoberts's gain was an estimated $1.87 million. Mr. Scrushy's gain on his Capstone shares and options, an estimated $3.5 million, was the largest of the three partners.
Scrushy Ran HealthSouth Real Estate on the Side The New York Times April 14, 2003

Mr. Martin is a Director of Capstone Capital, Inc. and MedPartners, Inc. and is a principal of 21st Century Health Ventures.
HealthSouth SEC reports HRC directors 31 March 98

to contents

Other linked companies

There is some information in the press about several other public and private companies which HealthSouth and Scrushy formed. The SEC and the federal government committee examined all of Scrushy and HealthSouth's linked businesses. These companies were formed in close association with HealthSouth which usually provided the initial capital. The founders and directors were usually HealthSouth directors and staff. Much of the company's business was usually with HealthSouth.

Source Medical Solutions and

The proxy says that HealthSouth has invested in two start-up companies, Source Medical Solutions and, and that some of its executives or directors were also investors. Last year, HealthSouth paid $100 million for its services. HealthSouth sold an information system business to Source Medical last year and is currently paying the company $2.5 million a year to license the system. HealthSouth has advanced the company $82 million to cover costs relating to its start-up.

These kinds of transactions are "always problematic," said Charles M. Elson, the director of the Center for Corporate Governance at the University of Delaware.

Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

Investigators probing HealthSouth- - - - - are also looking into at least two other firms with close ties to the healthcare services provider and its ousted Chief - - - - - also trying to unravel a series of deals involving start-up firms MedCenterDirect Inc. and Source Medical Inc.
Scrushy made private investments in the companies, which did millions of dollars in business with HealthSouth, the Journal said.

MedCenterDirect, based in Atlanta, Georgia, sells hospital supplies, while Birmingham, Alabama-based Source Medical provides outpatient information solutions, including software and technology.

HealthSouth probe looks at two other companies-WSJ
Reuters April 02, 2003

Scrushy was an original investor in Birmingham's Source Medical Solutions, a software company founded by former HealthSouth Vice President Daryl Brown. The company's first product was developed inside HealthSouth, Source Medical's largest customer. This month, Source Medical fired 110 workers, about one-fourth of the payroll, because of lower-than-expected sales from HealthSouth's expense cutting.
Rocket-like Ascent Tumbles Back With Crushed Investors The Birmingham News April 13, 2003

Wall Street sources familiar with HealthSouth say the government is also likely to examine the relationship between HealthSouth and, a start-up financed by New Enterprise Associates, which invested $12 million in 2000. (This is a venture capital group that bankrolled HealthSouth in 1984 and whose co-founder Chuck Newhall has been a director of HealthSouth and

In 2001, HealthSouth bought $100 million in supplies through MedCenterDirect, whose investors also included HealthSouth directors and executives, according to government filings.
HealthSouth talent is said to be in its sleight of hand The Baltimore Sun April 13, 200

Among the companies Mr. Scrushy invested in was MedCenter, a hospital supply company. Mr. Newhall has served as a director, and his venture capital firm helped provide financing for the company. In an interview last fall, Mr. Newhall said he recused himself from any board decisions involving his or his firm's investments.
HealthSouth has also invested in Ms. Givens's venture capital firm, and she and Mr. Newhall were involved in buying a staffing company for doctors and therapists from HealthSouth at the end of 1998, according to proxy statements.
2 HealthSouth Directors Quit the Board of Another Company New York Times April 4, 2003

Brimmer also confirmed a report in the Birmingham News that HealthSouth will have to write off a $2.2 million investment in MedCenterDirect, Atlanta, an online purchasing company whose investors also included HealthSouth founder Richard Scrushy. According to securities filings, HealthSouth also guaranteed $15 million in loans to MedCenterDirect and purchased $174.6 million in goods, supplies and services through the company.
HealthSouth to revamp ambulatory division Modern Healthcare's Daily Dose Oct. 1, 2003

Source Medical, a HealthSouth Corp. spin-off that had been having cash flow problems, now says it has raised additional money from investors after having cut jobs to hold down expenses.
The company said Wednesday it had raised $7.5 million from investors. The new shares cut HealthSouth's 25-percent ownership stake to about 7 percent, said Source Medical spokesman Mike Ragsdale.
It trimmed 165 jobs last year after it ran short of money and was rebuffed by former HealthSouth Chief Executive Richard Scrushy when it asked for more.
HealthSouth holds an $82 million note payable by Source Medical that represents the Birmingham-based therapy clinic operator's investment in the company, and is the guarantor of a $6 million loan, according to HealthSouth's Securities and Exchange Commission filings.
HealthSouth spin-off says financial outlook is improving (Associated Press) February 19, 2004

The U.S. attorney in Birmingham, Ala., filed three counts of conspiracy and securities fraud charges against
Sonny Crumpler (click to see) , a former HealthSouth Corp. employee, - - - - .
Crumpler in 2000 became chief financial officer for Source Medical Solutions, - - - - - - - - , contending that Crumpler knowingly signed financial statements that inflated how much Source Medical owed HealthSouth. If convicted of all charges, Crumpler faces a maximum sentence of 15 years in prison and more than $1.25 million in fines.
Former HealthSouth division controller charged Modern Healthcare Daily Dose December 30,2004

Crumpler has been indicted on two counts of conspiracy and securities fraud, with a third count asking for a forfeiture of more than $2 million of alleged ill-gotten gains. Between 1996 through 2002, Crumpler earned $3.18 million with a base salary of $1 million and $330,000 in bonuses according to the indictment.
Ex-HealthSouth executive pleads innocent The Birmingham Business Journal <> Jan 10, 2005

A former HealthSouth Corp. executive was convicted Friday of conspiracy and lying to auditors for his role in a $2.7 billion fraud at the rehabilitation chain.
Besides 15 years imprisonment and more than $1 million in fines, prosecutors are asking a court to make Crumpler turn over $2.2 million in assets they claim he made from the earnings overstatement.
Ala. Jury Convicts Ex-HealthSouth Exec The Washington Post (AP) November 18, 2005

21st Century Health Ventures

Scrushy also invested HealthSouth money in his own business ventures, records show. Scrushy and former HealthSouth finance chief Michael Martin formed an investment firm in 1997 called 21st Century Health Ventures. HealthSouth gave the fund $10 million to invest on its behalf, company records show.
Rocket-like Ascent Tumbles Back With Crushed Investors The Birmingham News April 13, 2003

From 1996 until 1999,
Hicks also was a principal with ousted HealthSouth CEO Richard Scrushy and former chief financial officer Michael Martin in 21st Century Health Ventures, a firm that reportedly invested some $10 million for HealthSouth.
Former HealthSouth VP pleads guilty in fraud case Newswires (AP) August 29, 2003

Pathology Partners

In a company news release at the time, Bennett said he and ousted HealthSouth CEO Richard Scrushy had "identified a number of entrepreneurial opportunities arising within HealthSouth" that he wanted to explore.

Bennett now serves as chairman of Pathology Partners, a Dallas company that operates labs that perform blood and tissue tests for surgery centers and hospitals.

Scrushy was an investor in Pathology Partners, whose board members once included Will Hicks, a HealthSouth executive who has agreed to plead guilty to making false statements to auditors and falsifying financial records.
Former HealthSouth president's lawyers says he's target of probe The Miami Herald (Associated Press) Aug. 28, 2003


HealthSouth Corp. loaned more than $45 million two years ago to a company run by its former finance chief without a review by HealthSouth's board of directors, according to a newspaper report.
HealthSouth loaned Birmingham, Ala.-based Meadowbrook $20 million and extended a $25.5 million credit line to Meadowbrook in late 2001, The News reported.
The transactions were not disclosed to HealthSouth's board, company spokeswoman Laura Smith said, and they were not disclosed to investors in regulatory filings. Martin left the company in April 2000.
Meadowbrook acquired four acute rehabilitation and long-term acute care hospitals in Florida, Texas, Oklahoma and Louisiana in December 2001 from HealthSouth, according to HealthSouth's report to the Securities and Exchange Commission.
HealthSouth Loaned $45M to Ex-CFO's Firm The Baltimore Sun <> November 23, 2003

to contents

Scrushy's Private companies

Not only did Scrushy and his family accumulate vast wealth and personal assets but he formed a number of private companies which owned these assets. There were other businesses as well, some dealing with HealthSouth. He employed an accountant to manage his personal companies and by all account these were a mess. They were run in a most unbusinesslike manner. This accountant committed suicide amidst allegations that he was defrauding Scrushy. The companies made loans to one another which were never paid. They also borrowed from HealthSouth. They also did business with HealthSouth. One of the Medicare fraud actions which HealthSouth settled for $7.9 million involved the purchase of equipment from a company owned by Scrushy's parents.

Scrushy was a flamboyant philanthropist and involved in a number of charitable and community endeavours to which he and HealthSouth both contributed. It was not always clear whether marketing and philanthropy were separated.

Last year, HealthSouth agreed to pay $7.9 million to settle a Justice Department suit that accused HealthSouth of health care fraud for having bought computers from the parents of the company's chairman, Richard M. Scrushy. - - - - - -

In 1997, Mr. Scrushy, one of the highest-paid chief executives in health care, and another HealthSouth executive created a private investment fund. Then HealthSouth invested in some of the fund's holdings and agreed to lend it up to $10 million. When the fund was dissolved, less than two years after it was created, HealthSouth did not get its cash back but instead received preferred stock in one of the fund's properties as payment for what it was owed, according to the 2000 proxy statement. The company said the value of that stock "was equal to or greater" than the remaining indebtedness.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

Mr. Scrushy's personal finances are a tangled web of a charitable foundation, a holding company -- Marin, named after his middle name -- and related companies such as Uppseedaisees, which is run by his wife and sells women's loungewear.
HealthSouth Tape Reflects Doubt The Wall Street Journal April 15, 2003

For example, HealthSouth joined with a loungewear company headed by his wife to sponsor the Junior Miss America program. Mrs. Scrushy is a former Junior Miss America.

The company has also put millions of dollars into a promotional show, the Go-For-It Roadshow, geared to children and featuring sports celebrities and musical groups, according to former company employees. The show was recently disbanded.
More Charges Expected in HealthSouth Inquiry New York Times March 25, 2003

- - - - Craig Dahle, an F.B.I. spokesman in Birmingham, Ala., said officials were examining Mr. Scrushy's many personal businesses in a widening investigation of his dealings with the company, the nation's largest chain of rehabilitation hospitals and clinics. Offshore banking is part of the inquiry, he said, - - - -

A separate part of the inquiry is looking at William Massey Jr., a crucial figure in Mr. Scrushy's personal businesses. Mr. Massey, who killed himself on July 30, was an accountant who managed Marin Inc., an umbrella company for the chairman's interests, - - - - .

Mr. Massey made at least one quick business trip to the Bahamas in April, - - .
Government officials are also looking at the relationship between HealthSouth and other companies that Mr. Scrushy managed or invested in, seeking to determine if company money was misused or improperly accounted for. - - - - .

While Mr. Scrushy built HealthSouth into a health care giant over the last 15 years, he made time for many other ventures, and some of them had business dealings with HealthSouth. His companies included Marin Air‚ "Mr. Scrushy's middle name is Marin‚" which leased a fleet of jets and other planes used by him and other HealthSouth executives, and Marinda, a radio production unit. HealthSouth sponsored a weekly radio talk show featuring Mr. Scrushy and Jason Hervey, a former actor who was listed as a senior vice president and communications director for the company.
Mr. Hervey, a onetime child actor on "The Wonder Years" television show, had moved to Birmingham from California to assist Mr. Scrushy in producing a televised HealthSouth-sponsored program for young people called the "Go-for-It Road Show" and managing a trio of female pop music singers billed as 3rd Faze.
HealthSouth also sponsored a sports events and the national Junior Miss America contest. The company also participated with Mr. Scrushy in donations to schools and libraries, and many of them were named for him. Last week, HealthSouth removed Mr. Scrushy's name from a conference center.

"All facets relating to Mr. Scrushy are being looked at at this point," Mr. Dahle said, including "whatever outside interests he might have had and whatever his actions may been as chairman of HealthSouth."
HealthSouth Inquiry Looks for Accounts Held Offshore The New York Times March 31, 2003

- - - - the SEC presented testimony from the bookkeeper for Marin, a holding company that manages five corporations run by Scrushy. The bookkeeper, Mary Schabacker, said the only debts those corporations have is to each other and that they don't pay them. ''It's all currently due,'' she said. Referring to a loan from one of the companies to Upseedaisies, a clothing line run by Scrushy's current wife, Leslie, Schabacker said, ''Do we have plans to (pay) it? No.''
Schabacker testified last week that Scrushy's privately held companies -- which control his airplanes and his 92-foot luxury yacht, Chez Soiree -- employ four housekeepers, two nannies, a ship captain, boat crew and security personnel, among others.

Schabacker became Scrushy's accountant last September, a month after the apparent suicide of Bill Massey, - -

Scrushy 'was set up,' says lawyer :: Former CEO's bookkeeper talks USA TODAY 15 April 2003

In other testimony, Mr. Scrushy's accountant said that her predecessor had an affair and admitted he stole money before he committed suicide last summer.
"It's still an ongoing process, but at least a half million" dollars, Ms. Schabacker said - - - .

The F.B.I. has said that the circumstances of Mr. Massey's suicide are among the areas it is investigating, along with the accounting fraud, possible insider trading at HealthSouth, and the possible existence of offshore assets owned by Mr. Scrushy.
Lawyer Discusses the Timing Of HealthSouth Revelations The New York Times April 15, 2003

In court, Schabacker said one of Scrushy's intertwined companies controls his airplanes and another is for his 92-foot yacht, Chez Soiree. The others are for personal trusts, real estate and the management structure of his personal fortune.

Employees of the five corporations Scrushy controls frequently do work for his other companies, she said, and Scrushy transfers personal money into them. He has 31 brokerage and bank accounts, she said.

Schabacker said Scrushy's accounts were "a mess" when she took over because Massey "hadn't been doing his job." The corporations still don't have "good numbers," Schabacker said, so she is filing for extensions of today's tax deadline.
HealthSouth chief created a financial maze, court told Seattle Times Probably 15th or 16th April 2003

Stock options for friends and the heads of profitable customers were a feature of the Wall Street Scandals involving the banks. Scrushy is claimed to have sought favours from Sony in this way. Sony denies this and its chief did not take up the options.

Embattled healthcare services provider HealthSouth Corp. <HLSH.PK> gave 250,000 stock options to Sony Corp's former music head Thomas Mottola, at a time when HealthSouth's former chief executive was trying to promote a pop music band, The Wall Street Journal reported Wednesday.
The options grant to Mottola was the largest single award HealthSouth ever made under its decade-old stock option plan for "consultants," The Journal said.
HealthSouth spokesman Andrew Brimmer told the newspaper that the company awarded Mottola the options after Scrushy advised the board that it would help further HealthSouth's "entertainment strategy."
HealthSouth Gave Former Sony Exec Options Reuters August 2003

to contents


The close band of people who founded HealthSouth included Charles W. Newhall III and Aaron Beam who later pleaded guilty to fraud. Newhall put up the cash when HealthSouth was founded. After the company went public it was joined by C. Sage Givens. Both Newhall and Givens were venture capitalists with conflicts of interest and some authorities thought they were unsuitable for the post. The problems were the extensive financial dealings and holdings of these directors in HealthSouth and its linked companies.

Directors, as well as company executives, were allowed to have what Mr. Scrushy once described as "bitty pieces" of various ventures that he and HealthSouth were involved with because Mr. Scrushy said he thought the investments would help motivate these people to make the ventures successful. Mr. Scrushy defended the board last fall as a group of "sophisticated people" who recused themselves when necessary and avoided potential conflicts of interest.
2 HealthSouth Directors Quit the Board of Another Company New York Times April 4, 2003

A national chain of rehabilitation hospitals and outpatient centers, HealthSouth started almost two decades ago with venture capital from New Enterprise Associates of Baltimore. New Enterprise co-founder Charles W. "Chuck" Newhall III, a major figure in the venture trade, has served on HealthSouth's board ever since.
HealthSouth talent is said to be in its sleight of hand The Baltimore Sun April 13, 2003

Two outside directors, the venture capitalists C. Sage Givens and Charles W. Newhall III, have also had business dealings with HealthSouth, company filings show. HealthSouth invested in Ms. Givens's venture capital fund, and both Ms. Givens and Mr. Newhall were involved in buying a company from HealthSouth at the end of 1998. Both have been board members since the mid-1980's, shortly after HealthSouth became a public company.
Over the years, HealthSouth directors and officers have also had relationships among themselves. One longtime director, Dr. Phillip C. Watkins, for example, used to own a Florida vacation home with Mr. Scrushy. Another director, Joel C. Gordon, has been a paid consultant to the company while serving on its board, according to the company's 1999 proxy statement.

Some directors are also investing in business ventures financed by HealthSouth, according to the current proxy, which offers no details about which directors are involved or the amounts of their investments.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

C. Sage Givens and Charles W. Newhall III, who have been longtime directors of HealthSouth, stepped down from the board of the Amerigroup Corporation in late March, - - - - . Amerigroup is a managed care company.

The decision by the two directors could signal growing pressure on some members of the HealthSouth board. Ms. Givens and Mr. Newhall are among the directors who have come under sharp criticism for their business dealings with the company and its former chairman and chief executive, Richard M. Scrushy.
Both Ms. Givens and Mr. Newhall are venture capitalists and have served on the HealthSouth board since 1985, according to the most recent HealthSouth proxy statement.
2 HealthSouth Directors Quit the Board of Another Company New York Times April 4, 2003

to contents

Insider trading

A civil action alleging insider trading has been commenced by the SEC against Scrushy and the most recent Chief Financial Officer William Owen. Shareholders lodged a barrage of insider allegations against Scrushy, close associates and HealthSouth in 1998 and again in 2002. The matters relate to alleged delays in releasing adverse information about profits, and the sale of large quantities of stock by insiders shortly before major downturns in the company's projected profits when the information was released.

September 2002
Securities and Exchange Commission filing shows HealthSouth Corp chairman Richard M Scrushy sold 94 percent of his stock in company on July 31, few weeks before company disclosed regulatory problems that caused sharp sell-off in its share price - - - - - - HealthSouth stock plummeted on Aug 27.
HealthSouth's Chief Made Timely Sale New York Times - Sept 6, 2002

Investors and others criticized Mr. Scrushy for having cashed in $74 million of stock options in May and repaying a $25 million risk-free loan from the company on July 31, just weeks before the company reversed its earnings outlook. The HealthSouth spokeswoman said he had to cash in the options, which were about to expire. She also said that Mr. Scrushy did not know about the Medicare billing issue
In a host of shareholder class-action lawsuits, lawyers representing investors have said that Mr. Scrushy and other HealthSouth insiders must have known that steep declines were in store for the stock this summer and earlier, in 1998, when they made big stock sales.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

The complaint asserts that defendants were aware as of the beginning of the class period that the federal agency responsible for administering healthcare reimbursements required services provided to two or more patients at a single time to be billed as "group" therapy service at a lower rate rather than as separate "individual" services at higher aggregate rates. This federal policy had been in place since the mid-1990s and yet defendants failed to disclose, or to factor into HealthSouth's publicly disseminated projections, the impact of that policy.

To show that he was not guilty of insider trading, he (Scrushy) and Mr. Owens took the extraordinary step of issuing a joint statement professing Mr. Scrushy's innocence. HealthSouth also hired a law firm to look into the accusations. By the end of October, HealthSouth was saying that the law firm had cleared Mr. Scrushy of any wrongdoing.
The firm's full report was never made public.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 24, 2003

In the October conference call, the normally domineering Mr Scrushy was forced to listen to a list of shareholder concerns including an account of executive share sales ahead of bad news, echoed by recent SEC allegations.

Investors worried about HealthSouth Financial Times April 15, 2003

to contents

C. Sage Givens

Ms Givens is probably a good example of the relationships, the sort of linked transactions, and the conflicts of interest which existed in HealthSouth.

A lot of the press criticism of HealthSouth, its convoluted dealings in which directors were involved, and the failure of directors to detect and stop the fraud is directed at Ms Givens. At the root of the problem is her financial involvement and her dealings with HealthSouth, Scrushy and the companies they spawned.

A staunch admirer and supporter of Scrushy, Givens has been on the HealthSouth board since 1985. She is a member of HealthSouth's audit committee. She has probably had closer dealings with the company and its staff over a far longer period than anyone else. Of all the directors involved she should have known about the many years of fraud, detected it as a member of the audit committee, and been in a position to confront those involved in the fraud.

Givens was a venture capitalist who made her name by persuading her company, a subsidiary of the same Smith Barney which later did so much business with HealthSouth to invest in the embryo HealthSouth in 1985. One wonders what her relationship if any was with Mr Lorello who played such a large part in HealthSouth's growth.

In 1995 Givens founded her own company Acacia Venture Partners. HealthSouth was one of the first to invest in this. It put in US $3.5 million, giving her company a boost.

Criticisms include the conflicts between her numerous business transactions with HealthSouth and her positions on the audit and compensation committees. Critics also claim that Givens and Newhall were both venture capitalists who had a very different perspective to the shareholders they were required to serve as directors.

A banner slogan on the Web site of the company founded by C. Sage Givens reads, "Connecting with the right people makes all the difference."

For better and for worse, the crucial connection for Ms. Givens has been to Richard M. Scrushy, - - - -

In 1984, Ms. Givens stumbled across an article in Modern Healthcare magazine about Mr. Scrushy and his start-up company of outpatient clinics. Then a 28-year-old vice president at First Century Partners, a venture capital arm of Smith Barney, she gave him a call and persuaded her superiors to invest $2.5 million in HealthSouth.
She joined the board at Mr. Scrushy's invitation in 1985. Since 1989, she has been a member of the audit committee, despite numerous business transactions with HealthSouth. She was also on the compensation committee until 2000.

A number of corporate governance experts suggest that Ms. Givens's web of financial ties to companies affiliated with HealthSouth may have prevented her from being a truly objective and independent director.
Corporate governance specialists say, though, that Ms. Givens had conflicts that grew out of her status as a venture capital investor. Another venture capital investor is on the HealthSouth board. Charles W. Newhall III, a general partner at New Enterprise Associates, has been a director since 1985 and has a similar tangle of ties to HealthSouth.

"Venture capital investors are a unique breed in that they tend to have a shorter-term perspective than directors with operating experience," said Sarah K. Stewart, a partner at Boardroom Consultants. "If there is any question of financial gain, they shouldn't serve on audit or compensation committees, nor should they call themselves independent."

- - - - - But the New York Stock Exchange has proposed that directors on audit committees should not accept any fee from the company. Though Ms. Givens did not accept a direct fee, the transactions she engaged in with HealthSouth put her in a gray area.

Regulators and governance specialists say that Ms. Givens's experience at HealthSouth raises the question of whether a venture capital investor's manifold links to a company may impede the rigor of his or her oversight responsibilities.
Having a corporate investor (in Acacia) of HealthSouth's stature was an attractive selling point for Ms. Givens's fund, though she had a roster of investors.

In 1998, HealthSouth sold a majority stake in CompHealth, a physician staffing business it had recently acquired, to Acacia and New Enterprise Associates. Acacia paid $1.8 million for its portion of the stake, a price set by an outside party.
More recently, Ms. Givens's fund invested $25,000 in Medcenterdirect, an e-commerce site for hospital products in which HealthSouth was a primary investor.
These kinds of engagements between a board member and the related company are frowned upon by some corporate ethics specialists.

"In such a case, Ms. Givens becomes a customer, in addition to being a director," said Michael Useem, a professor of management at the Wharton School at the University of Pennsylvania and a corporate governance consultant.
Given her time on the HealthSouth board, she has accumulated her share of stock options. - - - she has options and stock representing 310,000 shares, - - - . In 2001, she sold $2.8 million of HealthSouth stock - - .

Bankers who were involved with the HealthSouth board in the late 1980's describe Ms. Givens as driven and very much taken by Mr. Scrushy's quixotic vision to build what he would call the Wal-Mart of outpatient rehabilitation clinics.
She quickly became a star partner at First Century and went on to make a number of other lucrative investments in companies with ties to HealthSouth, including Integrated Health Services in 1988 and MedPartners in 1995.
She remains an active board member of the companies in which Acacia has stakes. People who have served on boards with her say that she is a tough-minded director who asks hard, even uncomfortable questions of management. - - - -

Which raises the question: In light of Ms. Givens's vast experience with the industry, the company and above all Mr. Scrushy, shouldn't she have been more aggressive in questioning HealthSouth management?
Questions About Investor on Board of HealthSouth The New York Times April 17, 2003

to contents

Political Connections (Added 2007)

 The large corporate chains are almost all large political donors and many senior executives have close relations with those in power. They frequently secure powerful government positions. HealthSouth was no exceptions. The donations to Siegelman, governor of Alabama eventually saw both of them in prison on a bribery conviction.

Under Mr. Scrushy's management, HealthSouth was a major player in health-care politics in Washington, D.C., Alabama and other states. In 2001, political action committees controlled by HealthSouth's lobbyists contributed tens of thousands of dollars to Alabama state legislators, while the company aggressively lobbied to obtain an exemption from the state review process for construction of a $300 million HealthSouth hospital in Birmingham.
During 2001 and 2002, HealthSouth's in-house political action committee contributed $120,000 in soft, or unregulated, money to Republican and Democratic Party committees in Alabama, according to campaign-finance disclosures. Mr. Siegelman, the former Alabama governor who lost a race for re-election last November, was instrumental in HealthSouth's ultimately successful effort to win the exemption during a special session of the state legislature. The vote permitted HealthSouth to proceed quickly on construction of its planned high-technology "digital hospital."
HealthSouth investigation widens Wall Street Journal August 22, 2003

A $250,000 donation HealthSouth made in 2000 to a foundation organized by Siegelman to pay off debts from his unsuccessful bid to create a state lottery in 1999. It was among more than $726,000 the Birmingham-based company has pumped into political campaigns and political parties in Alabama since 2000.
Probe of Ex - Governor Turns to HealthSouth The New York Times August 10, 2004

Once the scandal was over HealthSouth went back to making political donations - probably to members of those committees who have already, or might still participate in investigations or the drafting of legislation impacting on its business.

HealthSouth Corp. is back in the Washington game with a new political action committee raising money from employees and donating to congressional candidates.

The HealthSouth Corp. PAC replaces one that had been dormant since a financial scandal engulfed the Birmingham-based physical rehabilitation chain starting in March 2003.
Senior managers are making contributions of between $28 and $154 every two weeks. In its first seven months, the PAC raised $45,600 and spent about $31,000.
HealthSouth and its competitors are lobbying against a change in Medicare rules that would limit the types of patients who could be treated in the more intensive and expensive settings of inpatient rehabilitation hospitals.
From 1998 to 2002, HealthSouth Corp. itself gave about $360,000 to various federal arms of the Republican and Democratic parties. On Election Day in November 2000, for example, the Republican National Committee recorded a $100,000 contribution from HealthSouth.
HealthSouth rehabilitates atrophied political muscle The Birmingham News April 14, 2006

Top of page

Web Page History
This page created July 2003 by
Michael Wynne
Revised and Updated October 2007