HealthSouth Corporate Crime

HealthSouth Corporate Crime

Develop a timeline of the investigation and trials of the Health South/Scrushy crimes

On the 19th of March 2003, there was a raid on the headquarters of HealthSouth carting away a lot of documents (Werhane, 2008). SEC filed a lawsuit on that same day against Scrushy and HealthSouth for faking a total of one point four billion dollars in profit and Scrushy was suspended by the company. On the first of April 2003, the company dismissed Scrushy, and a couple of days later, he was accused of unfairly profiting from one hundred and seventy million dollars in the sale of stock between the years 1991 and 2003. He declined to answer any questions asked in federal court.

In that same month, Congress started to investigate HealthSouth demanding multiple documents from the company and Ernest & Young, its former auditor (Werhane, 2008). As time passed, the executives of HealthSouth started to plead guilty. For instance, Aaron Beam Jr, the former Chief Financial Officer pleaded guilty and aided the investigation by the government into the role played by Scrushy in the accounting fraud that was estimated at two and a half billion dollars by April. Also that same month, HealthSouth interim managers found out that shortly before the breakout of that scandal in March, some of the company executives such as the CFO William T. Owens had awarded themselves over half a million dollars of HealthSouth’s funds to cater for anticipated legal fees. On the 1st of May, Tadd McVay and Michael Martin the company’s former chiefs of finance pleaded guilty to the fabrication of profits. On the 7th of May, the federal judge surprised many when he granted Scrushy complete access to his property and money.

Mid-June, Scrushy confirmed to Congress that he could now testify about the financial collapse of HealthSouth on the condition that he be granted immunity from any criminal charges (Werhane, 2008). On the 7th of July, HealthSouth confirmed that it would not seek bankruptcy protection. Consequently, the price of their stock was raised amid hopes that HealthSouth could settle the issues with its creditors outside the court. In the attempt to stave off bankruptcy, HealthSouth sought more capital including half a billion dollars to pay off a three hundred and forty-five million debt of convertible bond which had already matured. By that point, eleven of the company’s former executives had pleaded guilty, with the majority of them describing HealthSouth as a “family” where every participant collaborated in presenting false financial materials.

In a congressional hearing on the 16th of October, Scrushy refused to respond to any questions concerning HealthSouth invoking the Fifth Amendment.  By early November 2003, he was being charged on eighty-five criminal counts which included conspiracy charges, wire fraud, security fraud, making false statements, mail fraud, money laundering, and the violation of the Sarbanes-Oxley (SOX) corporate crime law when he provided certifications that were false to security regulators (Werhane, 2008). He earned a profit of two hundred and sixty-seven million dollars by masterminding two point seven billion dollars in the overstated earnings. He was the first to be charged with the violation of Sarbanes-Oxley on the 14th of August that was signed into law the previous year. He pleaded innocent by the claim that his juniors were the ones responsible for the fraud without his cooperation or knowledge and was set free on a ten-million-dollar bond.

Explain the types of white-collar crimes committed by Scrushy/Health South employees

Accounting Fraud

Kenneth Livesay, the Chief Information Officer of HealthSouth alongside four other financial department members namely; Cathy Edwards, Virginia Valentine, Angela Ayers, and Rebecca Morgan pleaded guilty in the United States District Court for the Alabama Northern District (Wynne, 2007). William Owens and Weston Smith who are former Chief Financial Officers in the company alongside Emery Harris gave a guilty plea to charges of conspiracy and criminal fraud for scheming to inflate assets and earnings of HealthSouth for several years artificially. Richard Scrushy, the founder, was accused by the security regulators of overstating the company’s earnings by one point four billion dollars deliberately since the year 1999; similarly, they were charged for inflating the asset values by eight hundred million dollars. The United States office of Attorney in Birmingham Alabama stated that the scheme of fraudulent accounting in the company goes back to the year 1996.

Also, the National City Bank reported that HealthSouth had failed to pay an interest of twenty-one point two million dollars that were due on the 1st of April 2003 (Wynne, 2007). The Federal regulators charged both HealthSouth Corporation and Richard Scrushy with “massive” accounting fraud.  Also, the SEC complained that the company was overstating its earnings by over one billion dollars. According to the SEC, the overstatement of the company’s earnings occurred at the insistence of Scrushy and the enforcement director of the SEC stated that the fraud of HealthSouth represents investors’ appalling betrayal. Meanwhile, the Department of Justice confirmed that Weston Smith had agreed to plead guilty to charges of criminal fraud and he also agreed to cooperate with the ongoing investigation of HealthSouth.

Identify the theories and popular concepts that explain why these individuals engaged in criminal activities.

Institutional anomie theory

According to this theory, the high rate of crime partially stems from the “American Dream” emphasis in which all people are encouraged to succeed monetarily (The Scottish Center of Crime and Justice Research, 2018). However, the limited focus is put on the legal means of achieving success. Consequently, many people have attempted to get money via criminal activities or illegitimate success. Moreover, the monetary success emphasis is paralleled by economic institution dominance in the U.S. Noneconomic functions and roles for instance teachers and parents are not valued and do not receive much support, and these institutions are forced to accommodate themselves to the economic demands. For instance, children are neglected by their parents due to work demands and economic norms have penetrated other institutions such as the school system and the economic system which is in light with individualized competition for rewards. Consequently, institutions such as schools, families, and political systems are unable to socialize against sanctioned deviant behaviors and crime effectively.

Marxist Theories

Crime has been explained by Marxists in several ways. The strain theory argues that unemployed people and workers commit crimes due to their inability to achieve their economic objectives via legitimate channels (The Scottish Center of Crime and Justice Research, 2018). In this theory, it is argued that crime is based on poor conditions of living that are experienced by unemployed people or workers. The control theory explains that crime is a result of the fact that the majority of unemployed people and workers have a limited stake in society and are not included in business and governmental institutions. Some have drawn in the social learning theory emphasizing that capitalist societies tend to encourage an unrestrained money pursuit.

Social learning theory

According to this theory, people learn to take part in criminality basically through associating with others (The Scottish Centre of Crime and Justice Research, 2018). They get reinforced for crime; they get to learn the concepts that favor crime and are exposed to models of crime. As a result, they end up viewing crime as a desirable act or at least a justifiable act in various circumstances.

Determine how effective the Sarbanes Oxley Act (SOX) is in the reduction of white-collar crime

The creation of Sarbanes-Oxley was to restore trust and to mitigate information asymmetry (Galvin, 2015). The latter is a situation whereby in a transaction one party has superior or more information than another party. This occurrence is typical between public corporations and investors since it is not possible for all the investors to get involved in the daily operations. Even though total transparency is highly impossible, financial reporting tends to reduce the asymmetry by allowing investors to take a look at the finances of the company they are investing in (Wagner, 2006).

While Sarbanes-Oxley’s primary objective was to raise the confidence of investors, the law created ways of increasing quality (Galvin, 2015). In light of this, SOX has been a great success. Audits are increasingly transparent making the audit’s final result more valuable. The additions to procedures, compliance, and uniformity have assisted in making this possible. The SOX passage appeared to stabilize the market and there existed evidence of limited failures in audits immediately after SOX was effected. But the crash of the stock market in the year 2008 changed things drastically, and there was a deep recession in the economy, among the major causes of the crash were the various failure is financial institutions.

References

Galvin, M. A. (2015). SENTENCING CORPORATE CRIME: RESPONSES TO SCANDAL AND SARBANES. Retrieved from umd.edu: https://drum.lib.umd.edu/bitstream/handle/1903/16441/Galvin_umd_0117N_15922.pdf;sequence=1

The Scottish Center of Crime and Justice Research. (2018). Theories and Causes of Crime. Retrieved from ac. uk: http://www.sccjr.ac.uk/wp-content/uploads/2016/02/SCCJR-Causes-of-Crime.pdf

Wagner, L. D. (2006, April). The Unexpected Benefits of Sarbanes-Oxley. Retrieved from hbr.org: https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley

Werhane, P. H. (2008, October). Healthsouth (B). Retrieved from researchgate.net: https://www.researchgate.net/publication/228180093_Healthsouth_B

Wynne, M. (2007, Ocober). HealthSouth Staff and the Fraud. Retrieved from edu.au: https://www.uow.edu.au/~bmartin/dissent/documents/health/healthsouth_staff.html

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Week 5 – Assignment: Determine if an Offense is a Corporate Crime or an Avocational Crime

Instructions

Richard Scrushy is the founder of Health South Corporation, a global healthcare company located in Birmingham, Alabama. In 1986, Health South became a publicly traded company that continued to expand into new fields: worker’s compensation and sports medicine. The expansions allowed the company to double earnings and assets close to 100 million. By the early 1990s, the company had expanded to facilities in each of the 50 states and revenues exceeded 181 million.

In 1991, Medicare accused Health South of illegally adding costs for outpatient physical therapy. Medicare changed its funding arrangements, resulting in a 93 percent decrease in profits for Health South. Additionally, Blue Cross and Blue Shield of Alabama investigated Health South for improperly billed Medicare for therapy by students, interns, and unlicensed aids.

In 2004, the FBI investigated Scrushy and brought charges against him to the U.S. Securities and Exchange Commission (SEC).

Evaluate the Health South / Richard Scrushy case, and then prepare a written response to the following:

• Develop a timeline of the investigation and trials of the Health South/Scrushy crimes.
• Explain the types of white-collar crimes committed by Scrushy/Health South employees.
• Identify the theories and popular concepts that explain why these individuals engaged in criminal activities.
• Determine how effective the Sarbanes Oxley Act (SOX) is in the reduction of white-collar crime.

Support your paper with a minimum of three scholarly resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.