Suit Alleges EY, UBS Knew of HealthSouth Fraud

A suit filed last Thursday in U.S. District Court in the Northern District of Alabama charges that HealthSouth’s former auditors and investment bankers knew about fraud within the company long before it became public last year.

The suit, brought on behalf of stock and bond investors who bought into the company between 1998 and 2002, claims that its former auditors at Ernst & Young, and former investment bankers at UBS Warburg, knew about fraud within the company even as they signed off on financial statements and sold HealthSouth securities to the public, the New York Times reported.

The lead plaintiff is the Alabama Retirement Systems, which invested $35 million in the company’s bonds, losing half of it when the fraud was uncovered, John P. Coffey, an attorney representing the Alabama pension fund, told the New York Times.

"It is especially appalling that at the same time UBS bankers were urging investors to buy HealthSouth bonds, their own internal documents show that UBS considered HealthSouth to be a 'borderline' credit risk with a declining business model,'' Coffey told the Times. "And the bank even conditioned loaning money to HealthSouth on an internal decision to reduce the bank's credit exposure in months, if not weeks, after setting up the credit facility."

Both Ernst & Young and UBS Warburg denied wrongdoing. The suit alleges that Ernst & Young knew as far back as 1994 that HealthSouth was overstating its earnings and the suit alleges that an Ernst partner who was supervising the account told a HealthSouth executive to agree to unique accounting practices because Ernst & Young had looked the other way on $27 million in overstated earnings, the Times reported.

"The allegation is based on an unattributed quote, which we have no reason to believe is accurate,'' a spokesman for Ernst & Young, Charles Perkins, told the Times. "The problems at HealthSouth were the direct result of former management at the company, and Ernst & Young should not be included in the lawsuit."

UBS was equally vociferous in its denials. "Whilst we have not reviewed the claim in detail, as we have said previously, we have no reason to believe that anyone at UBS had any knowledge of the fraud at HealthSouth," Mark Arena, a UBS spokesman, told the Times. "We believe any claim that UBS had knowledge of the fraud is without merit and UBS will defend itself vigorously against any such claim."

HealthSouth’s founder and former chief executive, Richard Scrushy, was indicted last fall on 85 federal criminal charges related to the fraud. He has denied any role in the activities that led to inflated earning statements. Fifteen former executives have pleaded guilty to charges related to the fraud.

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