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HealthSouth board not told of loans

Embattled health services firm HealthSouth loaned more than $45 million to a company run by a former executive — and didn’t inform its own board of the deal, according to a newspaper report.
/ Source: The Associated Press

HealthSouth Corp. loaned more than $45 million two years ago to a company run by its former finance chief without a review by HealthSouth’s board of directors, according to a newspaper report.

The money went to Meadowbrook Healthcare Inc., controlled by former HealthSouth CFO Michael Martin, to purchase four hospitals from HealthSouth, The Birmingham News reported Sunday.

Martin, 42, pleaded guilty May 1 in U.S. District Court to conspiracy and fraud charges for his role in a massive accounting fraud at the medical services giant. He faces up to 15 years in prison.

HealthSouth loaned Birmingham, Ala.-based Meadowbrook $20 million and extended a $25.5 million credit line to Meadowbrook in late 2001, The News reported.

The transactions were not disclosed to HealthSouth’s board, company spokeswoman Laura Smith said, and they were not disclosed to investors in regulatory filings. Martin left the company in April 2000.

HealthSouth’s new management said federal investigators have sought information about the company’s dealings with Meadowbrook.

“We have been supportive in helping develop that information,” said Bryan Marsal, HealthSouth’s chief restructuring officer. A HealthSouth spokesman did not immediately return a call from The Associated Press for comment on Sunday.

U.S. Attorney Alice Martin declined to discuss specifics of the investigation, which has led to charges against 16 former HealthSouth officials, including former chief executive Richard Scrushy.

Martin’s attorney, Mark Hulkower, did not respond to a list of questions the newspaper said he had asked to be e-mailed to him. The News said it also was unable to reach John McRoberts, who now serves as Meadowbrook’s president and CEO.

Scrushy has pleaded not guilty to charges that include conspiracy, fraud and money laundering.

Scrushy attorney Donald Watkins said HealthSouth profited from the transactions with Meadowbrook because HealthSouth was able to shed underperforming facilities and reduce its $250 million liability from lawsuits.

“The economic impact was an overall positive for HealthSouth,” Watkins said.

He said he believes the deal was made known to the board and that it was properly disclosed to the SEC.

Meadowbrook acquired four acute rehabilitation and long-term acute care hospitals in Florida, Texas, Oklahoma and Louisiana in December 2001 from HealthSouth, according to HealthSouth’s report to the Securities and Exchange Commission.

HealthSouth said the deal, along with another transaction with a separate company, was valued at $31 million.

The SEC document didn’t disclose the loans to Meadowbrook or Martin’s association with the company.

Marsal said HealthSouth expects Meadowbrook to fully repay its loans, eliminating the need to write off the debt. Meadowbrook owes $13 million on the loan and more than $25 million on the credit line.

Both the loan and the credit line are due to be repaid in full in December 2006, Smith said. She said company records indicate the financing deals with Meadowbrook were never brought to the HealthSouth board of directors for approval.