HealthSouth's House of Cards Falls

Updated from 8:03 a.m. EST

The roof caved in on HealthSouth(HRC) and Chief Executive Richard Scrushy Wednesday, as the Securities and Exchange Commission charged that the scandal-plagued surgical rehabilitation company has been running a $1.4 billion accounting scam since 1999.

In the release, the SEC alleges that Scrushy directed a massive campaign to overstate HealthSouth's earnings by $1.4 billion in order to meet or beat Wall Street earnings estimates. The overstatements also affected the company's assets, which the SEC claims were inflated by $800 million by the third quarter of last year.

The news caps a year of swirling controversy for the Birmingham, Ala., health care company, dating to last summer when the company slashed hundreds of millions of dollars from its earnings forecasts because of Medicare changes. The SEC subsequently started investigating whether Scrushy bailed out of the stock before the shortfall was publicized.

"HealthSouth's fraud represents an appalling betrayal of investors," said Stephen M. Cutler, the SEC's Director of Enforcement. "HealthSouth's standard operating procedure was to manipulate the company's earnings to create the false impression that the company was meeting Wall Street's expectations."

Specifically, HealthSouth and Scrushy will be charged with violating provisions relating to fraud, bookkeeping and internal controls, and if the SEC gets its way both will face permanent injunctions and penalties seeking to recoup all of their ill-gotten gains.

Worried investors had already taken out most of their wrath on the company's stock, which last traded for $3.91 a share. They'll have to wait before doing anymore selling, as the SEC said the stock would stop trading for the next two business days because the company's financials weren't reliable.

The allegations follow an FBI raid on HealthSouth headquarters Tuesday night, in which agents gathered current and historical financial records, and also served a new grand jury subpoena on the company.

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