CFO First Sarbanes-Oxley Victim, Says Report

HealthSouth CFO will reportedly plead guilty to falsely certifying the company's financial statements. Elsewhere: Jury awards ex-Seitel finance chief $4.2 million, SEC moves against Household, and Al Gore signs on at Apple.


It’s a new era for U.S. businesses—and for the executives who run those businesses.

Case in point: Weston Smith, the former chief financial officer of HealthSouth Corp. Reportedly Smith will plead guilty to federal charges that he conspired to artificially inflate the health-care company’s earnings, and that he falsely certified that the company’s financial records were accurate.

If true, Smith would become the first executive to face criminal charges under the new rule passed last year under the Sarbanes-Oxley Act. That legislation requires the CEO and CFO of every publicly traded company to certify their financial results.

Also yesterday, the Securities and Exchange Commission filed separate charges against HealthSouth and its chief executive officer and chairman Richard M. Scrushy. The commission claims HealthSouth overstated its earnings by at least $1.4 billion to meet or exceed Wall Street expectations.

“Following the commission’s order last year requiring executive officers of major public companies to certify the accuracy and completeness of their companies’ financial statements, Scrushy certified HealthSouth’s financial statements when he knew or was reckless in not knowing they were materially false and misleading,” the SEC asserted in its complaint.

The announcements will likely get the attention of officers and directors at most publicly traded companies—not to mention the shareholders of those companies.

“This will be a great example that can be held up to the market,” Julia Grant, an associate professor of accounting at the Weatherhead School of Management at Case Western Reserve University in Cleveland, told Dow Jones. “It demonstrates to investors that the market works.”

The commission alleges that HealthSouth and Scrushy’s actions violated and/or aided and abetted violations of the antifraud, reporting, books-and-records, and internal-controls provisions of the federal securities laws.

The SEC is seeking a permanent injunction against HealthSouth and Scrushy, civil financial penalties and disgorgement of all ill-gotten gains or losses avoided by both defendants, and an order prohibiting Scrushy from ever serving as an officer or director of a public company. reported last month that HealthSouth was being investigated by the SEC. In addition, management at the health-care company received a subpoena from the U.S. Attorney’s office that indicated the company is being investigated for possible securities-law violations.

Former Seitel CFO Awarded $4.2 Million

A jury awarded $4.2 million in severance pay to former Seitel CFO Debra Valice, saying the seismic-data company breached her contract when she was fired, according to the Houston Chronicle, citing her attorney.

The jury also ruled that Valice was defamed by two news releases last June, and awarded her $780,000 in actual and punitive damages, the paper reported, citing her lawyer.

However, the jury also found that Valice breached her fiduciary duty and awarded Seitel $621,000.

“We believe there are inconsistencies in the jury verdict,” Seitel general counsel Leonard Goldstein told the paper.

The defamation charge stemmed from a statement made by the company asserting that Valice and former Seitel CEO Paul Frame improperly converted corporate funds for personal use, according to the report.

The company reportedly insisted the two should repay $4 million—including $3.2 million in the form of bonuses and commissions.

The demand came after the company lowered its revenues; thus, the results failed to reach the earnings level needed to justify their pay, according to the Chronicle.

The SEC has opened a formal investigation into whether the two former top executives wrongfully obtained their compensation.

SEC Moves Against Household International

In yet another regulatory action on Wednesday, the SEC settled fraud charges against Household International Inc., which agreed to the arrangement without admitting or denying the commission’s findings.

The SEC found that in Household’s recent MD&A and Results of Operations portion of its annual and quarterly reports filed since March 13, 2002, the company made “materially false and misleading statements concerning its restructuring and account management policies.”

The SEC found that Household, which issues MasterCard and Visa credit cards and makes home-equity and car loans, misrepresented its policies that permit the restructuring of delinquent loans. It charged that Household misrepresented its policies by falsely stating that it only restructured delinquent loans after receiving a certain number of consecutive payments and after obtaining evidence that the cause of the delinquency had been cured.

Household restructured many loans after receiving fewer than two payments, and restructured many loans automatically without communications with the borrower at the time, the SEC added.

“Restructuring policies directly impact a financial institution’s reported delinquency rates, which analysts and investors use as a key measure to evaluate the financial condition of a company like Household,” said Mary Keefe, director of the SEC’s Midwest regional office. “By making false statements about its restructuring policies, Household made it more difficult for analysts and investors to evaluate Household’s financial performance.”

The SEC findings follow a $484 million settlement reached last year between Household and all 50 states and the District of Columbia. The lending giant was accused of duping tens of thousands of poor home buyers with hidden and unnecessary costs.

Household has also been accused of predatory lending practices.

The SEC stated its investigation of Household would continue. Yesterday’s announcement from the commission comes just days before the company is scheduled to be acquired by London-based HSBC Holdings for $14 billion.

Short Takes

Management at Cisco Systems Inc. said its board of directors has authorized it to buy back up to $5 billion worth of stock. The board had previously authorized up to $8 billion in stock repurchases.

  • Apple announced that former Vice President Al Gore has joined the company’s board of directors. “Al brings an incredible wealth of knowledge and wisdom to Apple from having helped run the largest organization in the world—the United States government—as a Congressman, Senator and our 45th Vice President. Al is also an avid Mac user and does his own video editing in Final Cut Pro,” said Steve Jobs, Apple’s CEO, in a statement that will not diminish Apple’s reputation as the king of product placement.
  • The SEC said commissioners plan to attend a March 31 roundtable meeting organized by the new Public Company Accounting Oversight Board to examine issues relating to registration and oversight of foreign public-accounting firms. The PCAOB is soliciting comment on its recently proposed registration system and the appropriate scope of its oversight of accounting firms located outside the United States. The board has invited panelists representing foreign regulators, foreign accounting firms and industry organizations, and shareholder groups to attend.
  • Management at Interpublic Group of Cos. said the company is facing a federal audit of its income-tax returns for the years 1994 to 1996, noting that the Internal Revenue Service indicated it would challenge some elements of the returns. The company noted in a regulatory filing that it believed its returns were in compliance with tax law and that adequate provisions had been made for any foreseeable additional tax payments. Interpublic “does not anticipate any material earnings impact from the ultimate resolution of these matters,” the company’s management added.
  • Market research firm NPD Group Inc. said 41 percent of 2,645 people it surveyed earlier this month planned to spend less than usual between March and May. Just 14 percent planned to spend more than usual and 45 percent planned to keep spending about the same. The reasons for the cutbacks: worries about rising gasoline prices, continued job losses, and the Iraqi conflict.
  • Wells Fargo CFO Howard Atkins earned nearly $2.5 million last year, including a $1.65 million bonus, roughly quadruple the one he earned the prior year.
  • Wachovia Corp. CFO Robert Kelly also earned nearly $2.5 million, including a nearly $1.18 million bonus.
  • American Express CFO Gary Crittenden took home nearly $3.2 million, including a $750,000 bonus, up from $575,000 the prior year.

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