Kenneth K. Livesay, Angela C. Ayers, Kay Morgan, Cathy C. Edwards and Virginia B. Valentine

Litigation Release No. 18070 / April 4, 2003
Accounting and Auditing Enforcement Release No. 1752 / April 4, 2003

Securities and Exchange Commission v. Kenneth K. Livesay, Angela C. Ayers, Kay Morgan, Cathy C. Edwards and Virginia B. Valentine, Civil Action No. CV-03-S-0758-S

The Commission announced that on April 3, 2003, it filed a complaint charging Kenneth K. Livesay, Angela C. Ayers, Kay Morgan, Cathy C. Edwards and Virginia B. Valentine with violating and/or aiding and abetting violations of the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. These defendants served in HealthSouth's accounting and/or Finance department in different capacities. The complaint alleges that since at least as early as 1999, HealthSouth has been systematically overstating its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations. The false increases in earnings were matched by false increases in HealthSouth's assets. By the third quarter of 2002, HealthSouth's assets were overstated by at least $1.3 billion, or approximately 20 percent.

The complaint charged that, Livesay, Ayers, Morgan, Edwards and Valentine, in furtherance of the above scheme, made or directed other HealthSouth employees to make false accounting entries to inflate reported operating results. The Commission also charged that Morgan engaged in insider trading by selling at least 20,000 shares of HealthSouth stock while knowing that HealthSouth's financial statements grossly misstated the company's earnings and assets.

The Commission's complaint against Livesay, Ayers, Morgan, Edwards and Valentine charges that they each violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted HealthSouth's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The complaint also charges Edwards with violating Rule 13b2-2 for providing a falsified invoice to HealthSouth's auditors. The Commission is seeking permanent injunctions, civil money penalties and disgorgement of all ill-gotten gains or losses avoided by the defendants, and an order an order prohibiting Livesay, Ayers, Morgan and Edwards from ever serving as an officer or director of a public company.

The Commission also amended its complaint in SEC v. HealthSouth and Richard M. Scrushy, CV-03-J-0615-S (N.D. AL) to allege that, since 1991, Scrushy sold at least 13,823,000 shares of HealthSouth common stock for proceeds in excess of $170 million, based upon his knowledge of HealthSouth's actual financial results and the impact that disclosure of those results would have on the price of HealthSouth's shares. The Commission filed the original complaint in that matter on March 19, 2003. (Lit. Rel. 18,044)

The Commission thanks the U.S. Attorney's Office for the Northern District of Alabama, the U.S. Department of Justice, and the Federal Bureau of Investigation for their cooperation in this matter.

See Litigation Release 18044 (March 20, 2003), 18059, 18060 (April 1, 2003)

SEC Complaint in this matter