HealthSouth Scandalby Mason Sakoda

BUS-206-Q3590 Business Law I 15EW3

HealthSouth Introduction

• Leading provider of medical

rehabilitation

• More than 2000 locations

• Focused on economic

enrichment

• known for accounting fraud

Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth

History

• Founded in 1984 by Richard

Scrushy

• Became a publicly traded

company in 1986

• Grew by acquisition

Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth

The Start of a Scheme

Wallstreet Expectations

• By 1991, market analysts giving

positive stock evaluations

• Between 1995-1998, stock

increased by 250%

• Accountants match optimistic

profit projections to prevent

falling stock prices.

Ethics and Fraud at HealthSouth: Lessons from Inside a

Corporate Meltdown. (2011). Retrieved January 20, 2015,

from https://www.youtube.com/watch?v=R_K7bQpDJzg

Accounting Fraud“Fix” the Numbers

• If actual earnings were short, Scrushy told management to “fix

it”

• “Family meetings” were convened

• Accounting entries to reflect increased assets and decreased

liabilities

• Necessary to comply with GAAP

Detection of Fraud

HealthSouth and Scrushy under radar

• Scrushy accused of insider trading

• Scrushy’s lavish lifestyle goes public

• HealthSouth Headquarters raided by FBI agents

By the Numbers

• Securities Exchange

Commission(SEC) had

been investigating

HealthSouth for awhile

• By 2002, overstated

earnings by $1.4 billion

and assets by $800 million

• In 2002, sworn statements

required when submitting

financial reports.

Overstated by 4700%

Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth

Civil Action Lawsuit

• In 2003, SEC filed

accounting fraud in

federal court against

HealthSouth

• First time Sarbanes-

Oxley Act was enforced

• Violated sections of the

Securities Act of 1933

and Exchange Act of

1934

SEC(2012, August 10) Securities Exchange Act of 1934. Retrieved from http://www.sec.gov/about/laws/sea34.pdf

Morals and Ethics

• A company’s morals and

ethics start with each

individual

• Crime starts with small

compromising ideas

• You have the power to

stop fraud before getting

sucked in to it

Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth

References

HLSsettlements(2014, April 8) HealthSouth Securities Settlement Funds. Retrieved from

http://www.hlssettlement.com/healthsouth/docs.htm

B. Dooley, D. Gordon, M. Shachem(2013, July 10) Section 17(a) of the Securities Act of 1933: Unanswered

Questions. Retrieved from http://www.jdsupra.com/legalnews/section-17a-of-the-securities-act-of-1-59190/

SEC(2012, August 10) Securities Exchange Act of 1934. Retrieved from

http://www.sec.gov/about/laws/sea34.pdf

Assosiated Press (2003, March 20) SEC charges HealthSouth with $1.4 billion fraud. Retrieved from

http://www.sptimes.com/2003/03/20/Business/SEC_charges_HealthSou.shtml

Wikipedia (2015, February 4) HealthSouth. Retrieved from http://en.wikipedia.org/wiki/HealthSouth

Wikipedia (2015, February 3) Securities Act of 1933. Retrieved from

http://en.wikipedia.org/wiki/Securities_Act_of_1933

Any Questions?