NEW YORK (CNN/Money) -
The Securities and Exchange Commission filed a lawsuit Wednesday that accuses HealthSouth Corp. and its CEO and chairman, Richard Scrushy, of engaging in a $1.4 billion accounting fraud.
The civil charges came as the health services company said the FBI served a search warrant at its headquarters and the Justice Department said HealthSouth's former CFO will plead guilty to violations of securities law.
In its complaint, filed in federal district court in Birmingham, Ala., the SEC alleged that since 1999, at the insistence of Scrushy, HealthSouth (HRC: Research, Estimates) overstated its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations.
The government also said Wednesday the former chief financial officer of HealthSouth, Weston Smith, has agreed to plead guilty to fraud charges. Smith, 42, has agreed to cooperate with the federal government's ongoing investigation of corporate fraud at HealthSouth, the Justice Department said.
In its statement announcing the lawsuit, the SEC said it suspended trading in HealthSouth shares for two business days due to the "materially misleading information in the marketplace," adding that by the third quarter of 2002, HealthSouth's assets were overstated by at least $800 million, or approximately 10 percent.
"HealthSouth's fraud represents an appalling betrayal of investors," Stephen M. Cutler, the SEC's director of enforcement, said in a statement. "HealthSouth's standard operating procedure was to manipulate the company's earnings to create the false impression that the company was meeting Wall Street's expectations," Cutler said.
A company spokesperson who declined to be named said HealthSouth would respond to Wednesday's developments "as soon as possible."
Click here to read the SEC charges
"The recent events at HealthSouth's corporate office will not affect our ability to provide quality patient care," the spokesperson said. "Our operations across the country continue uninterrupted."
Merrill Lynch downgraded shares of HealthSouth to "sell" following the developments.
"Our downgrade of HRC shares today is indicative of the many uncertainties and risks facing the company which, in our opinion, make it very difficult to analyze," said the note from Merrill, which did not carry an analyst's name.
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Frank Morgan, an analyst at Jeffries & Co., said the federal charges "certainly make it very difficult for Scrushy" to remain CEO, although he said he was awaiting more details.
The Birmingham, Ala.-based company said earlier Wednesday that agents of the Federal Bureau of Investigation served it with a subpoena and a search warrant and were given access to financial records at its headquarters. HealthSouth said it would cooperate fully with authorities in their investigation.
The SEC launched its probe last September following revelations that Scrushy sold 2.5 million shares back to the company, or 94 percent of his stake, just weeks before the firm revealed that regulatory changes would hurt its earnings -- a disclosure that battered its stock.
Shares of HealthSouth closed at $3.90 Tuesday, down 75 percent from their 52-week high.
-- Reuters contributed to this report.
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