UBS AG agreed to pay $217 million to HealthSouth Corp. shareholders and bondholders to settle litigation they brought after an accounting fraud was discovered at the health-care services provider.
The settlements between UBS, Switzerland’s biggest bank, and the securities holders are the final ones in the litigation and were entered in the case docket yesterday. The shareholders will receive $117 million and the bondholders $100 million. In addition, Ernst & Young LLP, HealthSouth’s accounting firm, agreed to pay the bondholders $33.5 million. It settled with the shareholders last year for $109 million.
The litigation stems from a $2.7 billion fraud at HealthSouth that led to guilty pleas from 15 executives, including five former finance chiefs. The fraud unraveled in March 2003 when federal agents raided the offices of Birmingham, Alabama-based HealthSouth, the largest U.S. provider of inpatient rehabilitation services. The discovery caused a drop in the company’s share price that wiped out almost $6 billion in market value.
“We believe these substantial settlements reflect a great result for bond purchasers who were damaged as a result of the massive fraud at HealthSouth,” David Bronner, chief executive officer of the Retirement Systems of Alabama, the lead bondholder plaintiff, said in an e-mailed statement.
In settling, both Zurich-based UBS, HealthSouth’s investment bank, and New York-based Ernst & Young denied wrongdoing. U.S. District Judge Karon Bowdre in Birmingham must approve the agreements.
“UBS continues to deny all charges of wrongdoing or liability arising out of its engagement for HealthSouth,” Kristopher Kagel, a spokesman for the company, said in an e-mailed statement. “As established in multiple proceedings, HealthSouth’s corrupt insiders repeatedly lied to UBS bankers. This settlement is fully funded by insurance, except for a less than 3 percent co-insurance payment by UBS.”
“This settlement allows us to resolve the litigation brought by the bondholders of HealthSouth and avoid lengthy litigation,” Charles Perkins, a spokesman for Ernst & Young, said in an e-mailed statement.
The HealthSouth accounting fraud took place from 1996 to 2002, according to former chief financial officers who testified at the 2005 criminal trial of HealthSouth founder Richard Scrushy, who was acquitted. Scrushy is serving six years and 10 months in prison for his 2006 conviction on charges he bribed former Alabama Governor Don Siegelman.
The UBS settlements bring the total for the shareholders to at least $601 million. In addition to the Ernst & Young agreement last year, the shareholders reached a $355 million settlement with HealthSouth in 2006 and got $20 million from UBS in an Alabama state-court case.
The total for the bondholders is at least $228.5 million. They got $90 million from the HealthSouth settlement and $5 million from UBS in state court.
In addition, both classes will receive what can be obtained from a $2.88 billion judgment against Scrushy in an Alabama state-court case.
“These are excellent settlements for the bondholder class after many years of hard-fought litigation,” Max Berger, a lawyer for the bondholders at Berstein Litowitz Berger & Grossmann LLP, said in a phone interview today. “The class will recover a substantial percentage of their damages.”
UBS in 2008 agreed to pay HealthSouth $100 million over claims the bank didn’t see the fraud while raising billions of dollars for the company. HealthSouth said it would use the money to cover legal expenses, pay shareholders and bondholders and cut debt.
The case is In re HealthSouth Securities Litigation, 03cv1500, U.S. District Court, Northern District of Alabama (Birmingham).