The story of HealthSouth in the 1990s and early 2000s is about a corporate network of rehabilitation hospitals that skyrocketed up Wall Street and then plunged off a cliff. It’s a story about sketchy ethics, tyrannical leadership, and crossing the line so often that boundaries disappeared.
HealthSouth’s former CFO’s, Aaron Beam and Weston Smith, candidly shared the ugly story of their rise and descent with students at Chicago Booth on May 9. The event was sponsored by Booth’s Leadership Development office in the Full-Time MBA program.
Founded in 1984 by Beam and Richard Scrushy, the company’s former chairman and CEO, HealthSouth went public two years later after Scrushy dazzled a group of Wall Street investors with a presentation on the company’s potential. By 1990 it ballooned to a $1 billion dollar corporation of hospitals and health care centers offering diagnostic services and rehabilitation therapy. As CFO with a large chunk of shares in the company, Beam became a millionaire. He remembers people asking how a company on such a steep upward trajectory was handling the start up costs. “From the beginning, we were putting things on the balance sheet that probably should have stayed on the profit and loss statement.”
By 1995 the company had health centers in all 50 states, plus 40,000 employees, 10 to 12 jets and a spot on the Fortune 500 list. Beam spent his millions on cars, condos and a collection of French neckties that equaled an entry-level salary.
All the while, Beam said he was allowing Scrushy to bully him and other HealthSouth executives into manipulating financial reports to reflect the numbers Scrushy promised investors. During a meeting in 1996, Beam told Scrushy they would have to finally report a bad quarter. Scrushy said no, and they devised a way to hide the earnings shortfall.
“I should have had the courage to stand up and say, ‘No, we can’t cross this line,’” Beam said. Scrushy promised to deny everything if Beam reported the fraud and accused Beam of not being a team player. “I couldn’t sleep,” Beam added. “I didn’t understand what crossing that line would do to me emotionally and mentally. I hated my job, hated myself. I started drinking more than I should.”
In 1997, Beam retired from HealthSouth, selling his company stock and walking away from a half-million dollar annual salary. He thought the deception was behind him —until March of 2003 when he heard on national television that a massive fraud had been uncovered at HealthSouth.
Prior to Beam’s FBI visit, Weston Smith had joined Scrushy in 1987 and in 2001 became CFO, manipulating ledgers to scheme auditors and keeping sold assets on the balance sheets, among other tricks. At its height in the late 90s, HealthSouth reported $4.5 billion in revenue— but those numbers were grossly inflated. “We had to come up with elaborate schemes to perpetuate the fraud,” Smith said. “It was a time of absolute nauseating excess, though the company wasn’t doing anything.”
Scandals at Enron, Tyco, and WorldCom pushed Congress to pass the Sarbanes-Oxley Act of July 2002, which mandated transparent financial reporting to protect investors from fraud. Scrushy abruptly sold $75 million in HealthSouth stock just as the legislation became law. That law is what led Smith to blow the whistle on Scrushy and HealthSouth.
Federal prosecutors tapped Beam and Smith to be a witnesses in a six-month trial against Scrushy that ended in a not guilty verdict in 2005. Two years later Scrushy was convicted of unrelated political bribery charges and is now serving a seven-year sentence in a Texas prison.
Smith served 14 months in federal prison, followed by a four-month stay in a half-way house in Alabama. Beam served three months of jail time and has recently self-published a book about his experience, titled HealthSouth: The Wagon to Disaster. The two now lecture business students on corporate ethics. “How does a fraud start?” Smith told students. “With thoughts like, ‘This is just temporary…We can’t disappoint Wall Street…Everybody does it.’ We saw that a lot of people were doing the same types of things we were doing. So, you start believing this is just business. “
Nurkholisoh Ibnu Aman was a risk management consultant and internal auditor in Indonesia when he followed news about the massive scandals at HealthSouth and other companies. “I was a distance away, and now I get to sit in the US, listening to the true story itself,” said Aman, a first-year student in Booth’s Full-Time MBA program. “This is very enlightening, exactly what I expect from a business school.”
— Kadesha Thomas