SEC Sees 'Betrayal' at HealthSouth

HealthSouth's stock, which last closed at $3.91 on Tuesday, is down 75% from its prescandal high. On Wednesday analysts were still attempting to digest the SEC's findings.

"The world was already aware of the SEC investigation, the [Justice Department] investigation and the shareholder lawsuits," said Jefferies analyst Frank Morgan, who rated HealthSouth a hold ahead of Wednesday's news. "Now, the fun begins with all the gory details. ... There's a lot more information to be disseminated."

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Already, the SEC's charges are clearly severe. According to the agency, Scrushy has long instructed the company's senior officers and accounting personnel to materially inflate earnings so the company could hit Wall Street targets.

By 1997, the agency says, the company's accountants routinely convened so-called "family meetings" to fix HealthSouth's earnings. The SEC says HealthSouth's accountants would generally follow through by increasing a revenue account and/or decreasing expenses to hike earnings. They would then cover their tracks, the agency says, by correspondingly increasing assets or decreasing liabilities under the established matching rules of accounting.

As time went on, the SEC says, the fraudulent behavior only escalated. HealthSouth allegedly began to falsify journal entries and invent invoices to hide overstatements from its independent auditors. Between 1999 and 2002, the SEC says, HealthSouth's practices resulted in a $1.4 billion overstatement in earnings and an $800 million overstatement in total assets.

But even before that period, the SEC says, company accountants had grown worried about the earnings game and asked Scrushy to end it.

"In the fall of 1997, when HRC's accounting personnel advised Scrushy to abandon the earnings manipulation scheme, Scrushy refused, stating in substance, 'Not until I sell my stock,'" the SEC complaint says.

The complaint goes on to charge Scrushy with profiting handsomely from the company's inflated earnings. Scrushy has sold nearly 7.8 million shares of the stock since 1999, and in 2001 -- the year with certified financials -- the CEO collected a $6.5 million incentive bonus and a $9.2 million salary that was largely based on hitting financial targets.

The SEC is seeking to force HealthSouth and its CEO to disgorge any ill-gotten gains. It also hopes to permanently bar Scrushy from ever serving as an officer or director of a public company again.