E&Y and UBS settle HealthSouth lawsuits

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Swiss bank UBS AG and accounting firm Ernst & Young LLP have agreed to pay $250.5 million to resolve investor lawsuits regarding an accounting fraud uncovered at HealthSouth Corp. in 2003.

The settlement brings to an end a long string of lawsuits against the company and its officers; its auditor, E&Y; and UBS, which raised capital for HealthSouth. HealthSouth is a Birmingham, AL-based operator of rehabilitation hospitals and surgical centers.

Most of UBS’s costs will be paid for by insurance, the company said. “UBS continues to deny all charges of wrongdoing or liability arising out of its engagement for HealthSouth,” a company spokesman said in an e-mailed statement, Businessweek reported. “As established in multiple proceedings, HealthSouth’s corrupt insiders repeatedly lied to UBS bankers.”

E&Y spokesman Charles Perkins said in an e-mailed statement that, “This settlement allows us to resolve the litigation brought by the bondholders of HealthSouth and avoid lengthy litigation.”

The fraud involved a scheme to artificially inflate HealthSouth’s assets and earnings, and cost the company an estimated $2.7 billion.

In the most recent settlement, shareholders will receive $117 million and the bondholders $100 million from UBS, and bondholders will receive $33.5 million from E&Y, which settled with shareholders last year for $109 million.

In 2008, UBS agreed to pay HealthSouth $100 million over claims the bank didn’t see the fraud while raising billions of dollars for the company.

UBS and E&Y denied wrongdoing, the court documents show.

Richard Scrushy, HealthSouth’s founder and former CEO, who was acquitted of criminal charges in the fraud, now faces an enormous financial penalty. An Alabama judge last June ordered Scrushy to pay $2.9 billion in a related civil case. Shareholders and bondholders will be awarded additional damages from whatever can be claimed from his estate. Scrushy’s family is attempting to hand over assets purchased from him to the court to avoid liability, The Birmingham News reported.

Scrushy is serving a seven-year sentence in a Texas prison stemming from his conviction in a different case involving bribery and mail fraud.

Since investigation of the fraud began in March 2003, 15 executives, including 5 chief financial officers, have pleaded guilty or have been convicted of participating in the fraud.

In 2006 HealthSouth Corp. agreed to pay $445 million to settle several lawsuits that were filed against the company and some of its former directors because of the accounting scandal. The settlement did not include UBS and E&Y.

The company agreed to pay the U.S. Securities and Exchange Commission, and other civil litigants, more than $500 million in cash and shares. Also, the company agreed to pay more than $350 million to settle suits for Medicare fraud.

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