Prosecutors Say the Case
On HealthSouth Widens

Federal prosecutors investigating accounting fraud at HealthSouth Corp. have also found evidence of tax fraud, obstruction of justice, witness intimidation, money laundering and public corruption, according to a court filing.

The U.S. attorney's office in Birmingham, Ala., has "uncovered evidence indicating multiple crimes by multiple suspects spanning several years," and "the suspects include dozens of individuals and corporations," according to court papers filed July 9 in federal court in Birmingham. "Some of the crimes are only now coming to light, weeks after the initial allegations of accounting fraud," prosecutors said in court documents. Prosecutors added that "additional suspects have agreed to plead guilty."

The court filing didn't provide further information on the additional allegations or plea agreements. U.S. Attorney Alice Martin declined to comment. Prosecutors filed the motion as part of a request to postpone the sentencing of four HealthSouth executives who have already pleaded guilty to fraud charges.

The government has accused HealthSouth, a Birmingham operator of clinics and hospitals, of overstating $2.5 billion in profits since 1997. A spokesman for HealthSouth's new management said the company continues to cooperate with all government inquiries.

KPMG LLP, an accounting and tax firm, has provided tax compliance and advisory services to HealthSouth since 1991. In addition, KPMG has provided tax advice for some HealthSouth executives since 1991. George Ledwith, a KPMG spokesman, said the firm doesn't comment on specific tax work.

The Wall Street Journal reported in April that federal investigators were questioning KPMG's tax work for HealthSouth. (See related article¹.)

In a July 10 ruling in response to the government's motion, U.S. District Judge Inge Johnson refused to reschedule a sentencing hearing beyond Sept. 5, and she denied the government's request to seal its motion.

Overall, 12 former HealthSouth executives, including all five of the company's former finance chiefs, have agreed to plead guilty to fraud charges. Federal prosecutors are continuing a criminal investigation into the company's ousted chairman, Richard M. Scrushy, and Mr. Scrushy hasn't been charged criminally. Mr. Scrushy, through his lawyers, has denied any wrongdoing.

Write to Chad Terhune at chad.terhune@wsj.com⁵

Updated July 25, 2003