SEC Sees 'Betrayal' at HealthSouth

It turns out HealthSouth (HRC Quote) is even sicker than most people thought.

According to the Securities and Exchange Commission -- which charged the company with numerous securities violations on Wednesday -- HealthSouth and its top executive intentionally overstated earnings by at least $1.4 billion in the past four years alone. The agency is seeking unspecified penalties from HealthSouth and its founding leader, Richard M. Scrushy, saying that since its birth as a public company more than 16 years ago, HealthSouth has set out to mislead investors about its true financial condition.

The SEC's action comes eight months after CEO Scrushy sold $25 million worth of HealthSouth stock -- or half his stake in the company -- just ahead of an earnings warning that sent the shares plunging. The SEC now maintains that HealthSouth contrived the sudden earnings shortfall to bring Wall Street's expectations down to the company's real earnings potential, sparing uncomfortable officers from certifying false financial statements in the future.

Getting Scrushed

But the earnings-manipulation scheme, allegedly hatched when HealthSouth first went public, did not end before Scrushy and the company's CFO-certified 2001 financial statements that overstated income (before income taxes and minority interests) by 4,700%, according to the SEC. The Justice Department announced Wednesday that the company's former CFO, Weston Smith, has already agreed to plead guilty to fraud charges and assist the federal government with its ongoing investigation.

In the meantime, the SEC has halted all trading in HealthSouth's securities for at least two business days because the company's current financial information is not reliable. The agency's action follows a raid Tuesday by the FBI, which is subpoenaing HealthSouth employees for information related to the company's earnings.

In a prepared statement issued Wednesday, the SEC blasted the company's actions.

"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."