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OPENING STATEMENT BY REP. DIANA DEGETTE FOR HEARING INTO FRAUD BY HEALTHSOUTH
Thursday October 16, 2003FOR IMMEDIATE RELEASE
October 16, 2003
Contact: Josh Freed
(202) 225-4431
DENVER, CO – U.S. Representative Diana DeGette (D-CO) of the House Energy and Commerce Subcommittee on Oversight and Investigation released the following opening statement for the hearing into corporate malfeasance by HealthSouth:
“Thank you, Mr. Chairman, for holding this very important hearing on the fraud that nearly brought down the $4 billion HealthSouth Corporation. This Committee has developed an enviable record in exposing and investigating fraud at some of the largest companies in this country, including Enron and Worldcom.
In response to the scandals at Enron and Worldcom, Congress passed important legislation in the form of the Sarbanes-Oxley Act, which took an integral step in increasing accountability and cracking down on corporate malfeasance throughout Corporate America. However, the revelations of the culture of deceit that pervaded HealthSouth and the countless measures members of the management team took in order to create and to protect their own fortunes, reminds us that corporate reform is nevertheless an issue that requires our immediate attention. Simply, the deception that permeated HealthSouth – from the management team to the Board of Directors to the internal and external auditing teams is an absolute outrage; it is yet another sobering instance of the triumph of greed and arrogance over a company’s fiduciary duty to its shareholders. Accordingly, it is incumbent upon us as a legislative body to send an unequivocal message that such crookedness should not – and will not – be tolerated.
Unlike the other cases we have investigated – namely, Enron and World Com, the case of HealthSouth has some unique characteristics. Namely, it is often very difficult to prove that a company’s chairman and chief executive officer had personal knowledge of the fraud. In this case, however, five chief financial officers covering the period from HealthSouth’s creation in 1984 to March of 2003, have pled guilty, and all of them have said that Richard Scrushy, the company’s chief executive officer, directed them to make changes in the company’s financial books when the company couldn’t meet Wall Street’s expectations – changes that allegedly amounted to nearly $3 billion.
Meanwhile, Mr. Scrushy claims he is innocent, but refuses to tell this Committee what he knows – and what he doesn’t know. He claims that these officers committed fraud to benefit themselves, but of course, the biggest beneficiary of the fraud and other questionable practices of HealthSouth was Mr. Scrushy himself.
Our investigation has revealed a company with a breathtaking lack of internal controls, and one of the most negligent boards we have observed. The company was under the total control of Mr. Scrushy with no countervailing corporate governance system in place. By all accounts, Mr. Scrushy ran HealthSouth by intimidation and manipulation. He refused to listen to top staff that told him what he didn’t want to hear and punished them by taking away responsibilities or playing staff members against each other. One of the board members has said that no employee could stand up against Mr. Scrushy without expecting payback. His director of security investigated the personal lives of board members who tried to oppose him. Employees suspected that there were hidden cameras in the office to watch them – and there were.
As a result, the compliance officer – who could have stopped this fraud in 1999 – failed to investigate credible allegations backed up by documentary evidence which were actually admitted to by the controller. The chief financial officer instructed him to "placate" the complainant. And the traditional internal controls also were missing. The internal auditor who reported directly to Mr. Scrushy by his orders could not look at the corporate books. Ernst & Young, the external auditor which should have picked up on some of these weaknesses, never once found a single concern with the company’s accounting practices or internal controls. In fact, even in 2003, as the company was unraveling, Ernst & Young still claimed internal controls were strong.
The HealthSouth board, stacked with personal friends of Mr. Scrushy, was awash in conflicts of interest that benefited them financially, and functioned as a rubber stamp for Mr. Scrushy. For example, the Board agreed to reprice stock options after they were granted to benefit Mr. Scrushy and the officers. The audit committee never met with the internal or external auditor except to get perfunctory annual reports. The current internal auditor did not meet with the audit committee for the first 18 months of his tenure. The auditing committee only met once in 2001.
These weaknesses allowed Mr. Scrushy and others to use corporate funds to their own advantage. Mr. Scrushy had seven corporate planes. He wanted to be a music entrepreneur so he spent over $1 million of HealthSouth’s money on 3rd Faze, a girl band that he hoped would be the next Destiny’s Child. The board approved a grant of 250,000 stock options to Tommy Mottola, then head of Sony Records, which subsequently signed 3rd Faze to a record contract. But the board can’t even remember why they did it. In 2002, the board approved a $100?million plan for HealthSouth to buy a TV sports channel, even though one board member told us it didn’t make any sense. But Mr. Scrushy wanted to do it so it was done.
HealthSouth also bought companies in which Mr. Scrushy had an interest and personally benefited. Mr. Scrushy, the board and the officers established and made personal investments in companies to which HealthSouth then gave business and loans. HealthSouth also invested in some of the businesses of its board members and, in one case, sold a company to investors which included two board members.
HealthSouth’s so-called code of ethics requires that all potential conflicts of interest be approved. According to the minutes provided to us, none of these conflicts was approved by the board. Some of them the board was not even aware of, and the investing public was aware of even fewer.
In every sense of the word, HealthSouth failed the investing public and its employees: it lied about its financial health by overstating its profits and assets by nearly $3 billion and attempted to cover up its deception with even more deception; it created a culture of fear and intimidation in which no employee or board member could question the company’s policies without fear of retribution; it lacked the necessary internal corporate controls so as to allow one man – Robert Scrushy to manipulate and deceive thousands of employees and investors; it embraced a Board of Directors that was overwhelmingly negligent, looking the other way and thereby ultimately turning its back on those who it should have been protecting – HealthSouth’s shareholders. Healthsouth failed every imaginable criterion for good corporate governance and embraced an environment in which fraud flourished. And ultimately those who have paid the most for HealthSouth’s failure have been – as in the cases of Enron and WorldCom -- the shareholders and employees.”
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October 16, 2003
Contact: Josh Freed
(202) 225-4431
DENVER, CO – U.S. Representative Diana DeGette (D-CO) of the House Energy and Commerce Subcommittee on Oversight and Investigation released the following opening statement for the hearing into corporate malfeasance by HealthSouth:
“Thank you, Mr. Chairman, for holding this very important hearing on the fraud that nearly brought down the $4 billion HealthSouth Corporation. This Committee has developed an enviable record in exposing and investigating fraud at some of the largest companies in this country, including Enron and Worldcom.
In response to the scandals at Enron and Worldcom, Congress passed important legislation in the form of the Sarbanes-Oxley Act, which took an integral step in increasing accountability and cracking down on corporate malfeasance throughout Corporate America. However, the revelations of the culture of deceit that pervaded HealthSouth and the countless measures members of the management team took in order to create and to protect their own fortunes, reminds us that corporate reform is nevertheless an issue that requires our immediate attention. Simply, the deception that permeated HealthSouth – from the management team to the Board of Directors to the internal and external auditing teams is an absolute outrage; it is yet another sobering instance of the triumph of greed and arrogance over a company’s fiduciary duty to its shareholders. Accordingly, it is incumbent upon us as a legislative body to send an unequivocal message that such crookedness should not – and will not – be tolerated.
Unlike the other cases we have investigated – namely, Enron and World Com, the case of HealthSouth has some unique characteristics. Namely, it is often very difficult to prove that a company’s chairman and chief executive officer had personal knowledge of the fraud. In this case, however, five chief financial officers covering the period from HealthSouth’s creation in 1984 to March of 2003, have pled guilty, and all of them have said that Richard Scrushy, the company’s chief executive officer, directed them to make changes in the company’s financial books when the company couldn’t meet Wall Street’s expectations – changes that allegedly amounted to nearly $3 billion.
Meanwhile, Mr. Scrushy claims he is innocent, but refuses to tell this Committee what he knows – and what he doesn’t know. He claims that these officers committed fraud to benefit themselves, but of course, the biggest beneficiary of the fraud and other questionable practices of HealthSouth was Mr. Scrushy himself.
Our investigation has revealed a company with a breathtaking lack of internal controls, and one of the most negligent boards we have observed. The company was under the total control of Mr. Scrushy with no countervailing corporate governance system in place. By all accounts, Mr. Scrushy ran HealthSouth by intimidation and manipulation. He refused to listen to top staff that told him what he didn’t want to hear and punished them by taking away responsibilities or playing staff members against each other. One of the board members has said that no employee could stand up against Mr. Scrushy without expecting payback. His director of security investigated the personal lives of board members who tried to oppose him. Employees suspected that there were hidden cameras in the office to watch them – and there were.
As a result, the compliance officer – who could have stopped this fraud in 1999 – failed to investigate credible allegations backed up by documentary evidence which were actually admitted to by the controller. The chief financial officer instructed him to "placate" the complainant. And the traditional internal controls also were missing. The internal auditor who reported directly to Mr. Scrushy by his orders could not look at the corporate books. Ernst & Young, the external auditor which should have picked up on some of these weaknesses, never once found a single concern with the company’s accounting practices or internal controls. In fact, even in 2003, as the company was unraveling, Ernst & Young still claimed internal controls were strong.
The HealthSouth board, stacked with personal friends of Mr. Scrushy, was awash in conflicts of interest that benefited them financially, and functioned as a rubber stamp for Mr. Scrushy. For example, the Board agreed to reprice stock options after they were granted to benefit Mr. Scrushy and the officers. The audit committee never met with the internal or external auditor except to get perfunctory annual reports. The current internal auditor did not meet with the audit committee for the first 18 months of his tenure. The auditing committee only met once in 2001.
These weaknesses allowed Mr. Scrushy and others to use corporate funds to their own advantage. Mr. Scrushy had seven corporate planes. He wanted to be a music entrepreneur so he spent over $1 million of HealthSouth’s money on 3rd Faze, a girl band that he hoped would be the next Destiny’s Child. The board approved a grant of 250,000 stock options to Tommy Mottola, then head of Sony Records, which subsequently signed 3rd Faze to a record contract. But the board can’t even remember why they did it. In 2002, the board approved a $100?million plan for HealthSouth to buy a TV sports channel, even though one board member told us it didn’t make any sense. But Mr. Scrushy wanted to do it so it was done.
HealthSouth also bought companies in which Mr. Scrushy had an interest and personally benefited. Mr. Scrushy, the board and the officers established and made personal investments in companies to which HealthSouth then gave business and loans. HealthSouth also invested in some of the businesses of its board members and, in one case, sold a company to investors which included two board members.
HealthSouth’s so-called code of ethics requires that all potential conflicts of interest be approved. According to the minutes provided to us, none of these conflicts was approved by the board. Some of them the board was not even aware of, and the investing public was aware of even fewer.
In every sense of the word, HealthSouth failed the investing public and its employees: it lied about its financial health by overstating its profits and assets by nearly $3 billion and attempted to cover up its deception with even more deception; it created a culture of fear and intimidation in which no employee or board member could question the company’s policies without fear of retribution; it lacked the necessary internal corporate controls so as to allow one man – Robert Scrushy to manipulate and deceive thousands of employees and investors; it embraced a Board of Directors that was overwhelmingly negligent, looking the other way and thereby ultimately turning its back on those who it should have been protecting – HealthSouth’s shareholders. Healthsouth failed every imaginable criterion for good corporate governance and embraced an environment in which fraud flourished. And ultimately those who have paid the most for HealthSouth’s failure have been – as in the cases of Enron and WorldCom -- the shareholders and employees.”
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