In re HealthSouth Corp. Sec. Litig.
Holding All Bad Actors Accountable
For nearly a decade, HealthSouth Corp., its investment bankers UBS Warburg and UBS Securities LLC (“UBS”), and its outside auditor Ernst & Young LLP (“E&Y”) perpetrated the largest and most pervasive securities fraud in the history of U.S. healthcare, causing billions of dollars in losses to investors. A team of attorneys at Robbins Geller achieved two decisive victories against E&Y and UBS on behalf of stockholders.
On March 23, 2009, stockholder plaintiffs Central States, Southeast and Southwest Areas Pension Fund, Michigan Public School Employees Retirement System, State of Michigan Employees’ Retirement System, Michigan State Police Retirement System, Michigan Judges Retirement System, New Mexico State Investment Council and Educational Retirement Board of New Mexico announced a preliminary settlement with E&Y for $109 million, the eighth largest securities class action settlement entered into by an accounting firm since the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Additionally, on March 31, 2009, the Honorable Karon Owen Bowdre in the Northern District of Alabama certified a class of stockholders to proceed against UBS, rejecting the bank’s defense that the Supreme Court’s decision in Stoneridge Inv. Partners v. Scientific- Atlanta, Inc. shielded it from liability for defrauding the market.
Both litigation events followed on the heels of the landmark $445 million settlement HealthSouth investors reached with the company and certain of its former directors and officers. The settlement is among the top 15 settlements achieved against any defendant after the passage of the PSLRA. All three victories – the settlements with HealthSouth and E&Y and the class certification order against UBS – result from nearly six years of tenacious and hard-fought litigation.
HealthSouth is the nation’s largest provider of outpatient surgery and rehabilitative healthcare services. Between 1997 and 2003, HealthSouth, UBS and E&Y, led by former Chief Executive Officer Richard Scrushy, knowingly engaged in a massive fraudulent scheme. The fraud had several components. HealthSouth and its insiders reported false financial and operating results, “fixing” earnings shortfalls by entering fictitious accounting entries that totaled close to $2.7 billion by the end of 2002. Meanwhile, UBS funded the fraud, primarily by arranging and directly marketing bond offerings to investors, thereby enabling HealthSouth to raise sufficient cash to continue in business and pay taxes on the fictitious revenue. UBS also issued positive analyst reports on HealthSouth and structured dozens of acquisitions, credit facilities, and other transactions that kept HealthSouth afloat. Finally, E&Y turned a blind eye to the fraud, ignoring multiple red flags and issuing clean audit opinions, year after year, to maintain its lucrative relationship with HealthSouth.
This immense fraud ceased only after the FBI raided HealthSouth’s corporate headquarters in March 2003. Following the raid, the New York Stock Exchange halted trading in HealthSouth stock indefinitely, and the stock plunged to $0.10 per share. Mr. Scrushy, other HealthSouth executives, and E&Y were fired. Congressional and law enforcement entities launched inquiries, resulting in guilty pleas of 15 former HealthSouth executives in federal criminal prosecutions, including all 5 former Chief Financial Officers. The U.S. Securities and Exchange Commission (“SEC”) instituted enforcement actions against HealthSouth, UBS, and several of UBS’s former and current bankers and analysts. In April 2007, HealthSouth settled with the SEC for $100 million. The SEC’s enforcement actions against UBS and its former and current personnel remained ongoing. Mr. Scrushy was indicted and acquitted on all charges in June 2005, but was convicted on non-related public corruption charges in June 2006, and served time in federal prison.
In the aftermath of these prosecutions, scores of private securities class actions were brought on behalf of HealthSouth investors against the company, UBS and E&Y. Over a two-year period, Robbins Geller steadily dismantled UBS’s core defense that UBS’s “deceptive conduct” was purportedly non-public, behind-the-scenes, and amounted to nothing more than UBS “whisper[ing] in a client’s ear.” In January 2007, Judge Bowdre wholly rejected UBS’s characterization of its own conduct, finding that plaintiffs’ allegations involved far more than “UBS merely whispering in the ears of HealthSouth. . . . [UBS’s] conduct can, in fact, be the basis for a 10b claim.” A year and a half later, in May 2008, UBS filed a special motion contending that the Supreme Court’s decision in Stoneridge required the dismissal of plaintiffs’ complaint, arguing once again that UBS’s deceptive conduct was non-public and behind-the-scenes.
By then Robbins Geller, along with a group of forensic accountants and other experts, had conducted rigorous and extensive fact and expert discovery, including the review of 83 million pages of documents produced by defendants and nonparties and the taking and defending of 130 fact and expert witness depositions.
During the discovery process, Robbins Geller uncovered key evidence exposing UBS’s deceptive conduct regarding HealthSouth’s bond offerings. This evidence included that UBS targeted the equity market during the public marketing of the offerings and that UBS sent financial models of the bond offerings’ positive impact on HealthSouth’s stock price to equity investors. Robbins Geller also uncovered evidence of UBS boasting to the HealthSouth board about the positive impact of the bond offerings on the price of HealthSouth’s stock.
Based in part on submissions of this key evidence by Robbins Geller, in March 2009 Judge Bowdre issued an order holding that UBS’s deceptive conduct and misrepresentations “were not behind the scenes, in the shadows, nor immaterial to the mix of information on which the market relied.” The court found that “the false analyst reports and the public funding activities undertaken and engaged in by UBS were a necessary and an inextricably intertwined part of [the HealthSouth] fraud.” Judge Bowdre then certified a class of stockholders to pursue their claims against UBS for defrauding the market.
As a result of Robbins Geller’s vigorous prosecution, UBS paid shareholders $117 million. Robbins Geller continued to pursue E&Y for its key role in covering up the massive fraud which led to E&Y paying $109 million to the shareholders. The combined recovery of $671 million from HealthSouth, UBS and E&Y is among the largest settlements in securities class action history.
In re HealthSouth Corp. Sec. Litig., No. CV-03-BE-1500-S (N.D. Ala.).
- © 2009 Fulton County Daily Report