Group of HealthSouth Investors Files Suit Against Auditors, Investment Bank

A group of HealthSouth investors led by the Retirement Systems of Alabama has filed a lawsuit in U.S. District Court in Birmingham, Ala., alleging that the company's investment bankers and auditors "knew that fraud existed at the health care company or that they ignored clear signs of wrongdoing," the Wall Street Journal reports (Wall Street Journal, 1/9). HealthSouth, the nation's largest chain of rehabilitation hospitals, is being investigated by the Securities and Exchange Commission and the Justice Department for allegedly committing $2.7 billion in accounting fraud (Kaiser Daily Health Policy Report, 9/12/03). The suit names investment bank UBS Warburg and accounting firm Ernst & Young LLP as defendants (Wall Street Journal, 1/9). The suit names several other individuals as defendants as well (Morgenson/Abelson, New York Times, 1/9). The plaintiffs seek to recoup billions of dollars invested in the company, alleging that the defendants were "knowing participants" in the fraud. Specifically, the suit alleges that between 1999 and 2002, UBS banker William McGahan had "regular" conversations about the fraud at HealthSouth with a former company executive (Wall Street Journal, 1/9). The discussions addressed such topics as the likelihood of criminal prosecution and the penalties that could result from conviction, according to the Times. The suit also alleges that Ernst & Young knew as early as 1994 that HealthSouth had overstated its earnings (New York Times, 1/9). It states that G. Marcus Neas, then a partner on Ernst & Young's audit of HealthSouth's 1993 financial statements, "turned [his] head" on $27 million in overstated earnings, according to the Journal (Wall Street Journal, 1/9). Charles Perkins, a spokesperson for Ernst & Young, said, "The problems at HealthSouth were the direct result of former management at the company, and Ernst & Young should not be included in the lawsuit." Mark Arena, a UBS spokesperson said, "We believe any claim that UBS had knowledge of the fraud is without merit, and UBS will defend itself vigorously against any such claim" (New York Times, 1/9).