HealthSouth Corp. Case 10/16/1998

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Company Name(s): 
HealthSouth
Case Name: 
HealthSouth Corp. Case 10/16/1998
Case Status: 
Lawsuit Filed
Case Status: 
Judgment Issued
Case Status: 
Settlement Proposed
Case Status: 
Settlement Approved
Case Status: 
Case Dismissed
Affected Securities
NYSE: HLS
Lawsuit Overview
Type of Lawsuit: 
Shareholder Class Action
Date Filed: 
10/16/1998
Class Period Begin: 
08/12/1997
Class Period End: 
09/30/1998
Class Period Begin: 
04/24/1997
Class Period End: 
03/18/2003
Court of Filing: 
U.S. District Court for the Northern District of Alabama
Date Settled: 
09/28/2006
Settlement Amount: 
$445,000,000
Deadline to Participate in Settlement: 
08/11/2009
Summary: 

Case Settlement(Second Part) -

According to a press release dated March 25, 2009, a settlement of $109 million was reached in a securities class action against HealthSouth Corporation. The action, entitled In re HealthSouth Corp. Securities Litigation, is being prosecuted for the benefit of a class of investors led by, among others, Lead Plaintiffs the New Mexico State Investment Council and the Educational Retirement Board of New Mexico. The action is pending before the Honorable Karon O. Bowdre in the U.S. District Court for the Northern District of Alabama, Southern Division, and the proposed settlement requires Court approval.

According to a press release dated April 27, 2009, a hearing will be held on June 11, 2009, at 10:00 a.m., before the Honorable Karon Owen Bowdre, at the United States Courthouse, Hugo L. Black United States Courthouse, 1729 Fifth Avenue North, Birmingham, Alabama, for the purpose of determining: (1) whether the proposed settlement of the claims against defendant Ernst & Young LLP in In re HealthSouth Stockholder Litigation, No. CV-03-BE-1501-S, for the principal amount of $109,000,000 in cash should be approved by the court as fair, reasonable and adequate, and whether the Final Judgment and Order of Dismissal with Prejudice as to Ernst & Young LLP should be entered by the court.

Case Settlement(First Part) -

According to a press release dated November 6, 2007, February hearing has been set for HealthSouth Corp. stockholders who purchased shares between 1997 and 2003 to determine if the allocation and attorneys' fees for the settlement of $545 million in class action lawsuits are fair. The Securities and Exchange Commission reached agreements with the rehabilitation provider to repay defrauded investors who were the victims of HealthSouth's multibillion-dollar accounting scandal which was exposed in 2003. HealthSouth agreed to settle the SEC suit for $100 million and the class action suits for $445 million in cash and stock. On Feb. 7, 2008, a hearing will be held at the U.S. Courthouse for the Northern District of Alabama, Southern Division where eligible stockholders will be given time to comment on the allocation and attorneys' fees request at that time.

In a press release dated January 11, 2007, medical services provider HealthSouth Corp.said Thursday it received final court approval of to settle a securities fraud class action lawsuit for $445 million. The settlement, reached last year, is for lawsuits that charged the company with a massive financial fraud that nearly drove it into bankruptcy in 2003. HealthSouth did not admit any wrongdoing in the settlement. It includes $215 million in HealthSouth stock and warrants and cash payments by the company's insurance carriers totaling $230 million. The class will also receive 25 percent of any recovery from judgments HealthSouth receives against Richard Scrushy, its former chief executive; Ernst & Young, its former auditors; and UBS, its former primary investment bank. Each remains a defendant in derivative actions as well as the federal securities class actions. The settlement does not include Ernst & Young, UBS, Scrushy or any former executive who entered a guilty plea or was convicted of a crime related to the company's former financial reporting, HealthSouth said

In a press release dated November 6, 2006, a hearing will be held on January 8, 2007, at 1:30 p.m., before the Honorable Karon Owen Bowdre, at 140 Hugo L. Black United States Courthouse, 1729 Fifth Avenue North, Birmingham, Alabama to determine if the proposed settlement is fair, reasonable and adequate. The proposed partial settlement is for the principal amount of $445 million in cash and HealthSouth common stock and warrants, plus accrued interest on the cash portion of the settlement. The settlement class includes all persons who purchased or otherwise acquired the stock or options of HealthSouth Corporation including HealthSouth securities received in exchange for the stock or options of certain other companies acquired by HealthSouth between April 24, 1997 and March 18, 2003 ("stockholder class") and all persons who purchased or otherwise acquired HealthSouth bonds, notes or other debt instruments during the period between March 31, 1998 and March 18, 2003 ("bondholder class").

Case Summary -

In a press release dated September 27, 2006, HealthSouth Corporation announced that it has entered into definitive agreements with the lead plaintiffs in the federal securities class actions and the derivative actions, as well as certain of its insurance carriers, to settle litigation filed against HealthSouth, certain of its former directors and officers and certain other parties in the United States District Court for the Northern District of Alabama and the Circuit Court in Jefferson County, Alabama relating to financial reporting and related activity that occurred at the company during periods ended in March 2003. These agreements memorialize the preliminary settlement previously announced on February 23, 2006.

In a press release dated April 4, 2006, Attorney General Mike Cox and the Department of Treasury announced that the State of Michigan has been appointed co-lead plaintiff along with Central States and New Mexico in the securities class action lawsuit against HealthSouth Corporation, its former directors and executives, as well as HealthSouth's investment bankers and former outside auditors. As co-lead plaintiff, Michigan will co-manage the litigation on behalf of stockholders, negotiate potential settlement terms, and seek to maximize the recovery for the class. If the case goes to trial, the lead plaintiffs would make all strategy decisions. Together, the State of Michigan Retirement Systems (SMRS) hold more than $53 billion in assets, making the combined fund the 13th largest public pension fund in the United States. The SMRS invest on behalf of Michigan public school employees, state employees, state police, and Michigan judges.

In a press release dated February 23, 2006, investors who sued over a huge fraud at HealthSouth Corp. would get $445 million in stock and cash under a proposed settlement that the rehabilitation chain said resolves its thorniest legal problems stemming from the scheme. The Birmingham-based company will pay $215 million in common stock and warrants under the global settlement proposal announced Thursday, and insurance companies will pay another $230 million in cash. Stockholders and bondholders involved in class-action suits filed in federal court also will receive 25 percent of anything the company eventually gets in its lawsuit against fired chief executive Richard Scrushy, former auditor Ernst & Young and UBS, HealthSouth's former investment bank. The company said attorneys were still working on a final version of the agreement, which must be approved by a judge.

In addition, according to the article, HealthSouth came near bankruptcy after the fraud was revealed in March 2003, but it has since reconstructed years of financial statements and renegotiated lending agreements. In all, the company has announced $895 million in settlements related to the fraud. In 2004, the company agreed to pay the U.S. government $325 million to settle numerous allegations that it defrauded Medicare and other government health programs. The company last year agreed to pay $100 million over five years to settle a lawsuit filed by the Securities and Exchange Commission in 2003. That suit alleged an accounting fraud that eventually swelled to about $2.7 billion. The rehabilitation chain also reached a $25 million settlement in a class-action lawsuit over losses in its employee retirement fund, with insurers paying $18 million of the tab and the company covering the rest.

By the Order dated June 24, 2003, actions on behalf of open market purchasers of HealthSouth stock are consolidated for all purposes pursuant to Rule 42(a), Fed. R. Civ. P. These consolidated cases shall be referred to collectively as “In re HealthSouth Corporation Stockholder Litigation, Consolidated Case No. CV-03-BE-1501-S (the “Stockholder Litigation”). Bondholder actions shall be referred to collectively as “In re HealthSouth Corporation Bondholder Litigation,” Consolidated Case No. CV-03-BE-1502-S (the “Bondholder Litigation”). The Order further states the Stockholder Litigation and the Bondholder Litigation shall collectively proceed for pretrial and discovery purposes as “In re HealthSouth Securities Litigation under Master File No. CV-03-BE-1500-S.

In 2002, another complaint was filed charging that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of materially false and misleading statements to the market between January 14, 2002 and August 27, 2002. According to the complaint, throughout the Class Period, HealthSouth issued press releases and filed reports with the SEC announcing impressive revenue and earnings growth and repeatedly assuring the market that the Company was well on its way to meeting its financial targets for the year 2002 and that its fundamentals were strong. According to the complaint, these and other statements were materially false and misleading because they failed to disclose that the Centers for Medicare and Medicaid Services ("CMS") had issued directives reclassifying certain categories of reimbursements, which would have a materially negative impact on HealthSouth's business. The Complaint further alleges that defendants failed to disclose these facts, which had been known to them for many months, in order to allow defendants Scrushy and Strong to sell (collectively) millions of shares of the Company's stock at artificially inflated prices and so that the Company could commence a $998 million note exchange/offer on more favorable terms than if the truth regarding the CMS directives and their impact on the Company was known publicly. The note exchange/offering was commenced on August 27, 2002 -- one-day before the Company disclosed the negative developments for the first time.

The complaint further alleges that on or around August 27, 2002, HealthSouth shocked the market by issuing a press release announcing that CMS directives issued on July 1, 2002 concerning reimbursements may result in a $175 million shortfall in EBITDA from previously issued financial guidance for 2002 and that it could not provide further guidance for 2002 and 2003 because of uncertainties posed by the directives. In addition, the Company announced that it would spin-off its surgery-center division as part of a massive restructuring undertaken to deal with the developments and that defendant Scrushy would be replaced as CEO by defendant Owens. In response to this disclosure, HealthSouth stock plummeted by over 43% to close at $6.71 per share in a single day on extremely high trading volume.

The first Complaint filed in 1998 alleges that defendants violated sections 10(b)(5), and Rule l0b-5 promulgated thereunder, and 20(a) of the Securities Exchange Act of 1934 (the Act). Defendants, the Complaint alleges, failed to disclose existing negative trends that were affecting the Company's earnings and misrepresented the Company's prospects for success given those existing trends. During the Class Period, while in possession of material, adverse, non-public information, defendants sold a combined 83% of their personal, HealthSouth stock holdings for proceeds of over $163 million. The artificially inflated stock price also enabled HealthSouth to complete several major acquisitions using many fewer shares of its stock than it would have been forced to pay had the price not been inflated. Those acquisitions included Horizon/CMS Healthcare Corp. (NYSE: HHC) and National Surgery Centers (OTC: NSCI). When HealthSouth announced its problems on September 30, 1998, the price of its common stock plummeted to close at 10-1/2 down from 18-3/8 just two days before and from a Class Period high of 30-13/16.