U.S. Department of Justice

Alice H. Martin
United States Attorney
Northern District of Alabama


1801 Fourth Avenue North
Birmingham, Alabama 35203
Telephone (205) 244-2001
Fax (205) 244-2171

FOR IMMEDIATE RELEASE

DECEMBER 11, 2003
www.usdoj.gov/usao/aln


FIVE DEFENDANTS SENTENCED IN HEALTHSOUTH FRAUD CASE

BIRMINGHAM, AL - U. S. Attorney Alice H. Martin announced that five defendants were sentenced by a federal judge in Birmingham, Alabama, today for their admitted roles in a scheme to inflate the revenues and reported earnings of HealthSouth Corporation, the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitative services.

U.S. District Court Judge Inge P. Johnson sentenced former vice president of finance Emery Harris, who pleaded guilty in March 2003 to a charge of conspiracy and willfully falsifying books and records, to a term of five months in prison on each count to run concurrently, three years of supervised release with five months of unsupervised home detention, and payment of a $3,000 fine and a $200 special assessment. Harris also was ordered to pay $106,500 in forfeiture.

Former Accounting Department vice presidents Angela C. Ayers and Cathy C. Edwards, group vice president Rebecca Kay Morgan, and assistant vice president Virginia B. Valentine each were sentenced to four years of probation with six months unsupervised home confinement and payment of a $2,000 fine. Ayers and Valentine were ordered to pay a $100 special assessment, and Edwards and Morgan, a $200 special assessment. Morgan was also ordered to pay $235,000 in forfeiture. The four officers all pleaded guilty in April 2003 to conspiracy to commit wire and securities fraud, and Edwards and Morgan also pleaded guilty to wire fraud.

The five defendants, who all cooperated with the government's investigation into accounting fraud at HealthSouth, admitted in their guilty pleas to conspiring with other senior HealthSouth officers to fill a "gap" between HealthSouth's true earnings per share and Wall Street expectations, and then hiding the true nature of the company's financial condition. As part of the conspiracy, the defendants and other HealthSouth officers devised a scheme to artificially inflate HealthSouth's publicly reported earnings and the value of its assets and to falsifying reports of HealthSouth's financial condition.

As charged, Ayers made false entries into the asset accounts and contractual accounts of HealthSouth each fiscal quarter from 1999 through 2002; Edwards made false entries into HealthSouth's asset accounts each fiscal quarter from 2001 through 2002; Morgan made false entries in HealthSouth's cash accounts each fiscal quarter from 1999 through mid-2002; and

Valentine made false entries in HealthSouth's contractual allowance accounts each fiscal quarter from 1999 through mid-2002.

Harris admitted falsifying HealthSouth's finances to generate false entries, knowing that those entries would be included in the company's filings with the Securities and Exchange Commission, and that the investing public would rely on those false filings.

The HealthSouth investigation is continuing. The investigation is being conducted by the FBI-Birmingham Field Office, the Internal Revenue Service-Birmingham Division and the U.S. Postal Inspection Service. The prosecution is being handled by U.S. Attorney Alice H. Martin of the Northern District of Alabama and Assistant U.S. Attorneys with the White Collar and Asset Forfeiture sections of that office, along with lawyers from the Fraud and Asset Forfeiture and Money Laundering sections of the Criminal Division of the Department of Justice in Washington, D.C. The investigation is under the auspices of the Corporate Fraud Task Force, established by President Bush in July 2002 to investigate and prosecute allegations of fraud and other illegal conduct by executives at U.S. corporations. The Task Force is headed by Deputy Attorney General James B. Comey.

On Nov. 4, 2003, an indictment was unsealed in Birmingham charging Richard M. Scrushy, a former chief executive officer and chairman of the board of HealthSouth, with 85 counts including conspiracy; mail, wire and securities fraud; false statements; false certifications and money laundering. The indictment alleges that Scrushy caused HealthSouth to falsify financial statements, making the company appear more successful than it actually was.

Sixteen individuals have been charged with crimes in connection with the HealthSouth investigation since it began in March 2003, including the five defendants sentenced today. The government has secured 15 guilty pleas from those individuals, including former HealthSouth Chief Financial Officers Aaron Beam, Michael Martin, William Owens, Weston Smith and Malcolm McVay.