HealthSouth Ousts Five Directors to Settle Suit

HealthSouth will replace five of its directors to settle a lawsuit with the Teachers Retirement System of Louisiana, ending one of many lawsuits pending against the country’s leading operator of outpatient surgery centers and physical therapy clinics.

Not removed from the board in the settlement is founder and former CEO Richard Scrushy, who was indicted last month on numerous federal counts tied to a massive accounting fraud at the Birmingham, AL-based company. Scrushy has refused to give up his seat on the board and can only be forced out by a shareholder vote.

Fifteen former HealthSouth executives have already pled guilty to charges they participated in the effort to overstate the company’s earnings and that they committed $3 billion in accounting fraud. Scrushy, however, has maintained his innocence and will learn at a Dec. 9 hearing when his trial will begin. He also faces Securities and Exchange Commission charges.

To settle the Louisiana Teachers’ suit, HealthSouth agreed to remove John Chamberlin, Sage Givens, Charles Newhall III, Larry Striplin and George Strong on a staggered schedule that begins in December and ends by next August. Four directors will be chosen to take their place. Grant & Eisenhofer, the law firm representing the Teachers Retirement System of Louisiana, had demanded the removal of the five directors on whose watch the fraud occurred, the firm said in a statement.

"All of the legacy directors who were in place during the company's period of fraudulent business activity will be resigning," the pension fund's law firm, Grant & Eisenhofer PA, said in a written statement. "That still leaves multiple counts of self-dealing transactions against the directors to be decided at court, but shareholders have gained a major corporate governance victory with the latest settlement to bring in a new independent board at HealthSouth."

The three directors who joined the board after the fraud came to light in August 2002—Jon Hanson, Robert May and Lee Hillman—will stay on the board as will interim Chairman Joel Gordon

Tuesday’s settlement has no bearing on a spate of other lawsuits the Teachers Retirement System of Louisiana has pending against HealthSouth, Scrushy, the directors themselves and other third parties involved in the fraud, the law firm said.

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