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 Securities and Exchange Commission Litigation Release No. 18044 / March 20, 2003Accounting and Auditing Enforcement
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 | Shortly after HRC became publicly traded in 1986, and at Scrushy's
instruction, the company began to artificially inflate its earnings to
match Wall Street analysts' expectations and maintain the market price for
HRC's stock. Between 1999 and the second quarter of 2002, HRC
intentionally overstated its earnings, identified as "Income Before Income
Taxes And Minority Interests," by at least $1.4 billion in reports filed
with the Commission. HRC also overstated earnings, identified as "Income
Before Income Taxes And Minority Interests," in the quarterly reports on
Form 10-Q filed with the Commission during these years. |
| Pursuant to the scheme, on a quarterly basis, HRC's senior officers
would present Scrushy with an analysis of HRC's actual, but as yet
unreported, earnings for the quarter as compared to Wall Street's expected
earnings for the company. If HRC's actual results fell short of
expectations, Scrushy would tell HRC's management to "fix it" by recording
false earnings on HRC's accounting records to make up the shortfall. |
| HRC's senior accounting personnel then convened a meeting to "fix" the
earnings shortfall. At these meetings, HRC's senior accounting personnel
discussed what false accounting entries could be made and recorded to
inflate reported earnings to match Wall Street analysts' expectations.
These entries primarily consisted of reducing a contra revenue account,
called "contractual adjustment," and/or decreasing expenses, (either of
which increased earnings), and correspondingly increasing assets or
decreasing liabilities. |
| Scrushy has personally profited from the scheme to artificially
inflate earnings. He has sold at least 7,782,130 shares of HRC stock since
1999, when HRC's share price was affected by HRC's artificially inflated
earnings. Moreover, Scrushy received salary and bonus payments based on
HRC's artificially inflated earnings. |
| In mid-2002, certain HRC senior officers and Scrushy discussed the
impact of the scheme to inflate earnings because they were concerned about
the consequences of the August 14, 2002 financial statement certification
required under
Commission Order No. 4-460, Order Requiring the Filing of Sworn
Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of
1934 (June 27, 2002). ("Order 4-460"). |
| Scrushy knew or was reckless in not knowing that HRC's financial statements materially overstated its operating results. Nevertheless, on August 14, 2002, he and HRC's Chief Financial Officer certified under oath that HRC's 2001 Form 10-K contained no "untrue statement of material fact." In truth, the financial statements filed with this report overstated HRC's earnings, identified as "Income Before Income Taxes And Minority Interests" on HRC's income statement, by at least 4,700 %. |
The Commission alleges that HRC's and Scrushy's actions violated and/or aided and abetted violations of the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. Specifically, the Commission has charged HRC with violating Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. The Commission has charged Scrushy with violating Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1. The Commission also has charged Scrushy with aiding and abetting HRC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13.
For these violations, the Commission is seeking a permanent injunction against HRC and Scrushy, civil money penalties from both defendants, disgorgement of all ill-gotten gains and losses avoided by both defendants as a result of the conduct alleged plus prejudgment interest thereon. The Commission also is seeking an order (i) prohibiting Scrushy from serving as an officer or director of a public company, (ii) freezing the assets of Scrushy, (iii) requiring HRC to escrow in an interest-bearing account, all extraordinary payments (including compensation) to any director, officer, partner, controlling person, agent, or employee, and (iv) preserving HRC's documents.
The Commission also obtained emergency relief on March 19, 2003 against HRC and Scrushy in the District Court. HealthSouth consented to the entry of an order by the Court (1) requiring that the company place in escrow, under the Court's supervision, all extraordinary payments (whether compensation or otherwise) to its directors, officers, partners, controlling persons, agents, or employees, pursuant to the provisions of the Sarbanes-Oxley Act of 2002, (2) prohibiting the company and its employees from destroying documents relating to the company's financial activities and/or the allegations in the Commission's case against HealthSouth in Scrushy, and (3) providing for expedited discovery in the Commission's case. The Court also entered a temporary order freezing substantially all of Scrushy's assets.
Pursuant to a separate Commission order issued on March 19, 2003, trading in the securities of HRC was suspended for two business days due to the materially misleading information in the marketplace.
The Commission wishes to thank the U.S. Attorney's Office for the Northern District of Alabama, the U.S. Department of Justice, and the Federal Bureau of Investigation for their cooperation in this matter.
The Commission's investigation is continuing.
http://www.sec.gov/litigation/litreleases/lr18044.htm
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Modified: 03/20/2003 |