Attorney General Announces Settlement In HealthSouth Securities Fraud

Press Release, Aug 30, 2006

(Albuquerque, NM)  Attorney General Patricia Madrid today announced that HealthSouth, has agreed to a $445 million settlement of the federal securities class action filed against HealthSouth and others involving an immense and pervasive fraudulent scheme, undertaken over more than a decade, to inflate and manipulate HealthSouth’s financial statements by creating false revenue and income.  Attorney General Madrid on behalf of the Educational Retirement Board and the New Mexico State Investment Council served as Court appointed Co-Lead Plaintiff. 

“I am extremely pleased with the strong prosecution of this litigation and the aggressive settlement strategy.  As I have previously stated, no shareholder should be forced to bear this burden and my office will always fight to protect all shareholders.”  Attorney General Madrid added, “This settlement, and settlements in other cases handled by my Office, helps the citizens of New Mexico who have found themselves to be victims of corporate malfeasance.”

Under the proposed settlement, the class action against HealthSouth and certain of its former directors and officers will be settled for consideration consisting of HealthSouth common stock and warrants valued at $215 million and cash payments by HealthSouth's insurance carriers of $230 million or aggregate consideration of $445 million.  Ernst & Young, the company's former auditors, and UBS, the company’s former primary investment bank, remain as defendants in the federal securities class actions.

The facts of the fraud include the testimony of several members of management, including several CFOs, that former CEO, Richard M. Scrushy, would hold meetings with HealthSouth employees, who were directed to “fill the holes,” that is, fabricate portions of the financials in order to meet Wall Street’s earnings expectations.  Subsequently, HealthSouth withdrew its financial statements reported during the class period and admitted that its earnings during that time were overstated by approximately $2.8 billion.

Attorney General Patricia Madrid of New Mexico, representing Co-Lead Plaintiff New Mexico State Funds in the case remarked, “As long-term institutional investors, we hope the settlement will serve as a catalyst for HealthSouth’s turnaround.”

Hundreds of millions of dollars were lost by various public institutions as a result of the corporate malfeasance of HealthSouth and the other defendants.  Michigan public institutions, for example, lost $30 million and New Mexico public institutions lost approximately $14 million.