HEALTHSOUTH OFFICER CHARGED WITH CONSPIRACY TO COMMIT
WIRE AND SECURITIES FRAUD

WASHINGTON, D.C. - Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division, U.S. Attorney Alice H. Martin of the Northern District of Alabama, and Carmen S. Adams, Special Agent in Charge of the FBI Birmingham field office, announced today that Emery Harris, Vice President of Finance and Assistant Controller of HealthSouth Corp., has been charged with conspiracy to commit wire fraud and securities fraud and to falsifying financial information of HealthSouth that was used in filing false quarterly and annual statements with the Securities and Exchange Commission.

Harris, of Birmingham, Alabama, has agreed to plead guilty to the charges and cooperate with the government’s ongoing investigation of HealthSouth’s finances. A plea hearing is scheduled for 1 p.m. Central Time before U.S. District Judge Inge Johnson at federal court in Birmingham.

According to the three-count information filed at U.S. District Court in Birmingham, Harris served in various capacities in HealthSouth’s accounting department from 1992 until March 2000, and was promoted to his current position as Vice President of Finance and Assistant Controller in March 2000.

Count 1 of the information alleges that a conspiracy existed from January 1996 until the present between Harris and other senior officers to devise a scheme to artificially inflate HealthSouth’s publicly reported earnings and falsify reports of HealthSouth’s financial condition. Harris would provide the Chief Financial Officer and the Chief Operating Officer with monthly and quarterly preliminary reports showing HealthSouth’s actual financial results. After reviewing these reports, the senior officers would direct Harris and other members of HealthSouth’s accounting staff to find ways to ensure that HealthSouth’s “earnings per share” number met or exceeded Wall Street analysts’ projections. After the senior officers issued instructions as to the desired earnings per share number, HealthSouth’s accounting staff, including Harris, would meet to discuss ways to artificially inflate HealthSouth’s earnings to meet the CEO’s desired earnings numbers.

These meetings were known as “family” meetings, and attendees were known as the “family.” At the meetings, they would discuss ways by which members of the accounting staff would falsify HealthSouth’s books to fill the “gap” or “hole” and meet the desired earnings. The fraudulent postings used to fill the “hole” were referred to as the “dirt.”

According to the information, Harris and others made and caused to be made false and fraudulent entries in HealthSouth’s books and records for the purpose of artificially inflating HealthSouth’s earnings, and designed the fictitious accounting entries to avoid detection. The information states HealthSouth’s earnings were artificially inflated through methods such as manipulation of the “contractual adjustment” or other expense accounts to inflate revenue on the income statement, and false and fraudulent entries on the balance sheet concerning Property, Plant and Equipment (PP&E).

The criminal information alleges that, as a result of the scheme, Harris and other senior officers and their co-conspirators made and caused to be made false and fraudulent journal entries in HealthSouth’s books and records, knowing these would be reflected in the financial statements and public filings with the SEC. As part of the conspiracy, Harris, the senior officers and others caused HealthSouth to file publicly with the SEC annual reports and quarterly reports that materially misstated HealthSouth’s net income, revenue, earnings per share, assets and liabilities from at least 1999 until the present. As a result, HealthSouth’s revenue and earnings were inflated by hundreds of millions of dollars on publicly filed reports. For example, the information states that the balance sheet included in HealthSouth’s 10-Q for the second quarter of 2002 overstated PP&E by approximately $1 billion, or approximately 33 percent of the total PP&E reported. Cash on the same 10-Q was overstated by more than $300 million, and HealthSouth’s total assets were overstated by approximately $1.5 billion.

The information also states that as part of the conspiracy, senior officers met in August 2002 and discussed the need for the CFO to sign and file with the SEC a statement in which he falsely stated that Harris’ financial statement fairly represented the financial condition of HealthSouth. On Aug. 14, 2002, the CEO and CFO signed HealthSouth’s 10-Q for the second quarter of 2002, knowing that the 10-Q contained materially false and misleading information. The CEO caused the report, which was filed after passage of the Sarbanes-Oxley Act, to be transmitted by wire from Birmingham to the SEC in Washington, D.C.

Count 2 of the information charges Harris with falsifying HealthSouth’s finances for the purpose of generating false reports to be filed with the SEC, in violation of 15 USC Section 78m(b)(2)(A), 78m(b)(5) and 78ff, 17 CFR Section 240.1362-1, and 18 USC Section 2. The third count seeks forfeiture to the United States of any property which constitutes or was derived from proceeds traceable to these securities violations by Harris.

Harris faces a maximum penalty of 10 years in prison and $1 million in fines for knowing falsification of HealthSouth’s financial records, and 5 years in prison and a $250,000 fine on the conspiracy charge. Sentencing will be set at a later date.

Harris is the third person to be charged since the criminal investigation into HealthSouth’s finances began earlier this month. On March 26, William Owens, executive vice president and chief financial officer of HealthSouth, pleaded guilty to conspiracy to commit wire fraud and securities fraud, and filing false certification of financial information with the SEC. Former HealthSouth CFO Weston Smith pleaded guilty on March 19 to securities fraud, conspiracy to commit securities and wire fraud, and false certification of financial records.

Owens and Smith are both cooperating with the government’s investigation.

HealthSouth is a publicly traded corporation organized under the laws of the state of Delaware, with headquarters in Birmingham. The company employs more than 33,000 people and has approximately 1,800 facilities in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. HealthSouth claims to be the nation’s largest provider of outpatient surgery, diagnostic and imaging and rehabilitative healthcare services.

“Mr. Harris’ detailed knowledge of the mechanics of the various fraud schemes has sustained the pace of this investigation and helped identify other individuals who had knowledge and participated in the fraud,” said U.S. Attorney Alice H. Martin. “I again urge those individuals to contact my office to discuss how they can best ‘help themselves’ in this investigation, which is expanding beyond the finance department at HealthSouth.”

The HealthSouth investigation is being conducted by the FBI-Birmingham Field Office, with assistance from the Securities and Exchange Commission, Atlanta District-Enforcement Division. The prosecution is being handled by U.S. Attorney Martin and Assistant U.S. Attorneys with the White Collar Section and Assets Forfeiture Section of the U.S. Attorney’s Office, along with attorneys from the Fraud Section at the U.S. Department of Justice. The prosecution is being overseen by President Bush’s Corporate Fraud Task Force, chaired by Deputy Attorney General Larry Thompson.

The HealthSouth investigation is active and ongoing. Additional criminal charges are expected.

###

03-198