HEALTHSOUTH TREASURER CHARGED WITH CONSPIRACY TO COMMIT WIRE, SECURITIES FRAUD, FALSIFYING FINANCIAL RECORDS

WASHINGTON, D.C. - Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division, U.S. Attorney Alice Martin of the Northern District of Alabama, and Carmen S. Adams, Special Agent in Charge of the FBI Birmingham Field Office, announced today that HealthSouth Corp. Treasurer Malcolm McVay has been charged with conspiracy to commit wire and securities fraud and filing false financial information with the Securities and Exchange Commission.

McVay, 41, of Birmingham, Alabama, was charged in a three-count criminal information filed today at U.S. District Court in Alabama. McVay was employed at HealthSouth from 1999 to the present in various capacities, including chief financial officer and treasurer from August 2002 until January 2003. He currently serves as HealthSouth’s treasurer.

McVay has agreed to plead guilty to the charges and cooperate with the government’s ongoing investigation into HealthSouth’s finances.

Count 1 of the criminal information charges McVay with conspiracy to commit wire fraud, securities fraud and false books and records, in violation of 18 USC Section 371. The information alleges that beginning in about 1996, a group of HealthSouth’s senior officers, including the chief executive officer at the time, recognized that HealthSouth’s financial results were failing to produce sufficient earnings per share to meet Wall Street analysts’ earning expectations. According to the information, McVay and others conspired to artificially inflate HealthSouth’s publicly reported earnings and earnings per share, for the purpose of fraudulently enriching themselves.

As part of the conspiracy, senior officers would present the then-CEO of HealthSouth with monthly and quarterly preliminary reports showing HealthSouth’s true and actual financial results. At the CEO’s direction, senior officers and others would try to find ways to ensure that HealthSouth’s earnings per share number met or exceeded Wall Street analysts’ expectations. These instructions were then passed on to members of HealthSouth’s accounting staff.

According to the information, members of HealthSouth’s accounting staff would meet to discuss ways to artificially inflate HealthSouth’s earnings in order to meet Wall Street expectations. These meetings were known as “family” meetings and the attendees were known as the “family.” At the meetings, “family” members discussed how 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 “gap” or “hole” were referred to as the “dirt.”

It was further part of the conspiracy that senior officers and certain accounting personnel made and directed others to make false and fraudulent entries in HealthSouth’s books and records, in order to artificially inflate HealthSouth’s revenue and earnings per share. Methods included manipulating the “contractual adjustment” account and other expenses to artificially inflate revenue on the income statement. As a result, false and fraudulent entries were made to accounts in HealthSouth’s books and records, including to the Property, Plant and Equipment (PP&E) account, cash account, inventory account, and intangible asset accounts. According to the information, HealthSouth’s accounting personnel designed fictitious accounting entries to avoid their detection, and created false documents to be provided to HealthSouth’s auditors.

The information alleges that McVay and others caused HealthSouth to file publicly with the SEC annual reports and quarterly reports that materially misstated, among other things, HealthSouth’s net income, revenue, earnings per share and liabilities. As a result of the scheme, HealthSouth’s revenue and earnings were inflated by hundreds of millions of dollars on publicly filed reports.

Count 2 of the information charges McVay with false certification of financial information with the SEC, in violation of 18 USC Sections 1350 and 2. According to the information, McVay signed HealthSouth’s 10-Q for the third quarter of 2002, knowing that it did not fairly present the financial condition and results of operations of HealthSouth. On or about Nov. 14, 2002, McVay, the then-CEO and others caused that 10-Q to be transmitted by wire from Birmingham to the SEC in Washington, D.C. The third count seeks forfeiture of any property constituting or derived from proceeds traceable to violations by the defendant.

The maximum sentence for conspiracy to commit wire and securities fraud is five years in prison and a $250,000 fine, or double the monetary gain or loss. The charge of knowingly causing false certification of financial information under the Sarbanes-Oxley law carries a maximum sentence of 10 years in prison and a $1 million fine.

“HealthSouth has had five chief financial officers since its incorporation. Today’s filing brings to four the number of former CFOs for HealthSouth that have been charged with conspiracy to commit wire fraud and securities fraud, and all four have agreed to cooperate with investigators,” said U.S. Attorney Alice Martin. “Their knowledge of how the fraud was perpetrated and perpetuated make this a very focused search for the truth about this vast accounting fraud.”

HealthSouth was a corporation organized under the laws of the state of Delaware, with headquarters in Birmingham, Alabama. HealthSouth claims to be the nation’s largest provider of outpatient surgery, diagnostic and imaging and rehabilitative services, with approximately 1,800 facilities in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. The company employs more than 51,000 employees.

McVay is the 10th individual to be charged in the U.S. government’s ongoing investigation into HealthSouth’s finances. Former HealthSouth Chief Financial Officer Michael Martin was charged on April 8, 2003 with conspiracy to commit wire fraud and securities fraud, and falsifying financial information. A formal plea date has not yet been set by the court. Three weeks ago, five HealthSouth officers were charged and pleaded guilty in connection with accounting fraud, including Chief Information Officer Kenneth Livesay. HealthSouth Vice President of Finance Emery Harris had previously pleaded guilty to accounting fraud charges, as had Chief Financial Officer William Owens and former CFO Weston Smith. All defendants charged to date in the HealthSouth case are cooperating in the government’s investigation, which is ongoing and active.

The investigation is being conducted by the FBI-Birmingham Field Office, with assistance from the SEC, Atlanta District-Enforcement Division. The prosecution is being handled by U.S. Attorney Alice Martin and Assistant U.S. Attorneys with the White Collar Section and Asset Forfeiture Section of the United States Attorney’s Office, with assistance from attorneys with the Fraud Section of the Criminal Division of the Department of Justice in Washington, D.C. The prosecution is being overseen by the President’s Corporate Fraud Task Force, headed by Deputy Attorney General Larry Thompson.

Additional charges in the case are expected.

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