William T. Owens, chief financial officer of HealthSouth Corp., pleaded guilty yesterday to doctoring financial statements at the company, a week after its former chief financial officer pleaded guilty to securities fraud in the nation's latest big accounting scandal.
Owens, who has served in various high-profile roles at HealthSouth since 1987, pleaded guilty to conspiracy to commit securities fraud and filing false information with the Securities and Exchange Commission.
Prosecutors said Owens is cooperating and helping them build cases against others at HealthSouth, which was founded by chairman and chief executive Richard M. Scrushy. Scrushy's flamboyant and aggressive style helped shape the Birmingham-based company into the nation's largest operator of rehabilitation hospitals, but it also drew criticism from investor groups as the company's stock price declined. HealthSouth runs a network of about 1,600 facilities, including several in the Washington area.
In papers filed in U.S. District Court for the Northern District of Alabama, the government alleged that Owens and others schemed to deceive investors. Prosecutors said that since at least 1996, Owens provided top executives with HealthSouth's actual monthly and quarterly financial results. Then Owens and others allegedly directed the accounting staff to find ways to meet or exceed the expectations of Wall Street analysts.
The accounting staff would conspire to inflate the numbers at secret "family meetings," the government charged. "As the most senior HealthSouth executive to admit to this massive accounting fraud, Mr. Owens's cooperation in the investigation has helped us rapidly identify and understand the extent to which the company falsified its financial reports for the purpose of inflating its stock price," said U.S. Attorney Alice H. Martin.
Owens, who was interim chief executive at HealthSouth for a time last year, could be sentenced to 30 years in prison and fined $5.5 million, but the sentence could be less severe, depending on how much he helps prosecutors. The government also is seeking to recover from Owens any property he bought with money traced to the fraud.
Frederick G. Helmsing, an attorney for Owens, said his client "regrets the conduct that made today's proceeding necessary" and "has and will continue to cooperate with the government on its investigation and with HealthSouth."
Owens was released on his own recognizance.
Martin said prosecutors are talking with other current and former HealthSouth employees who attended the secret meetings.
As many as six other current and former HealthSouth officials with knowledge of the company's alleged accounting tricks are discussing plea deals with prosecutors, lawyers familiar with the investigation said.
"This case is moving quickly, to say the least," said Richard Jaffe, an attorney for Kay Morgan, an assistant controller at HealthSouth who has met with government investigators.
The scandal came to light March 19 when former chief financial officer Weston L. Smith pleaded guilty to securities fraud, conspiracy, wire fraud and false certification of financial records. On the same day, the SEC brought civil fraud charges against HealthSouth and Scrushy. It said that the fraud resulted in earnings being inflated by more than $1.4 billion since 1999.
Investigators are also looking into what HealthSouth's outside advisers knew about the company's financial condition, sources said.
"There's more to come," said Ronald Crawford, an official in the SEC's Atlanta regional office. "The investigation is going to be looking at other people."
The long-term nature of the alleged fraud has caused accounting experts to raise questions about what HealthSouth's auditor, Ernst & Young, should have detected. A spokesman for the accounting firm said it is cooperating with investigators.
"Neither the SEC nor the Department of Justice has informed Ernst & Young that the firm or any of its people are the subject or target of any investigation," the firm said in a prepared statement. Noting that the SEC has charged HealthSouth with creating phony documents to mislead auditors, the firm said, "We remain outraged at the violation of investor trust that took place at HealthSouth."
UBS Warburg, the lead investment bank that worked with HealthSouth on mergers and other deals, would not comment yesterday. Neither the bank nor two of its executives close to HealthSouth have been contacted or subpoenaed by investigators, according to sources familiar with the case.
HealthSouth said it has hired financial advisers, lawyers and forensic accountants to get through its financial problems. The New York Stock Exchange delisted the company's stock, which is trading on the over-the-counter market.
Ernie W. Knewitz, a HealthSouth spokesman, said the company was "moving to dismiss" Owens and is negotiating "round the clock" with lenders over financial covenants that expire April 1.
It is unclear how much cash HealthSouth has available to pay bondholders, who are due about $345 million next week.
Scrushy, who was placed on leave last week, could not be reached for comment. His attorney did not return calls. The SEC last week asked a judge to limit Scrushy's access to bank accounts, citing concern that he might transfer his assets while the investigation continues.