What's up guys and welcome back to wall street millennial on this channel, we've covered many frauds and scams. Most of them are centered around the financial services industries. Today, we're going to switch things up a little bit and talk about one of the biggest health care related frauds in us history. This fraud saw a publicly traded alabama-based hospital operator, fabricate 2.7 billion of profits in a sophisticated scam that lasted many years.

We're talking about the 2003 health south scandal before we get into the video we'd like to thank our channel members. Members get access to our backlog of videos before they release to the general public. The backlog can be viewed by members in our community tab of the youtube page. Our current backlog includes some great videos about corporate frauds and failures.

Members also get to vote on some of our video topics and by becoming a member you're supporting the channel. Thank you. Health south was established in 1984 in birmingham alabama by richard skrushy, an experienced healthcare industry, professional health south specialized in post-acute healthcare services which treats patients suffering from chronic conditions in 1986. Just two years after it was incorporated.

Health south ipod on the nasdaq skreshi used the ipo proceeds to fund a rapid expansion of the business by 1990. They were operating 50 healthcare facilities across the united states with revenues reaching hundreds of millions of dollars per year throughout the 1990s scrushi developed an insatiable appetite to acquire other hospital companies, and the business grew even more rapidly. In 1993, they acquired national medical enterprise for 300 million dollars. In 1994, they acquired re-life for 180 million dollars and in 1995 they acquired surgical health corporation for 155 million dollars.

Their biggest acquisition came in 1997 when they acquired horizon cms for 1.8 billion dollars, which many industry analysts called the deal of the century. The acquisitions appeared to be successful by the turn of the millennium. They were operating hundreds of locations throughout the united states and booking billions of dollars of revenues and profits. Founder and ceo, richard skrushy became a legendary figure in the healthcare industry for his ability to grow a hospital organization so quickly and profitably in the late 1990s health.

South stock, more than tripled to peak at over 150 dollars per share scrushi, had grand ambitions to expand the business even further. In 2001, they announced a partnership with software company oracle to create the world's first all all-digital hospital campus, but not everything at health south was going as well as it seemed on the outside. After acquiring so many hospital companies so quickly, they were having trouble entering them into the main business they had to integrate all the acquired companies, accounting logistics and other operations under the centralized control of the parent company merger integration can be incredibly complicated. It is notorious for frequent cost overruns and delays.

That's exactly what happened with health. South health south bend off more than nick to chew, with scruschi's decade-long merger in the 90s. However, richard strushi did not want to admit that his company was having problems by this point. He was already worth hundreds of millions of dollars in living a lifestyle beyond the imagination of ordinary people.

He owned the iconic lake martin house on a private island in alabama, which was worth tens of millions of dollars, but money can often be like a drug once you're a millionaire. You won't be satisfied until you're, a billionaire. Even if you buy a mansion, there's always a bigger mansion down the street for scrutiny to meet his grand ambitions of personal fortune, he needed his company's stock price to keep going up. Aaron beam, who is health south cfo at the time, eventually recounted his experience with crushing.

He says that scrushi would go to wall street every year to meet with the analysts covering health south stock. He would ask them what he needed to do for them to maintain their buy rating on the stock. Whatever the analyst's expectations were, squishy would promise to meet or even exceed the targets in 1996 beam told squishy that the business wasn't doing that well and they would miss their earnings estimates for the quarter. Scrushi was livid and screamed that beam ordering him to adjust the numbers such as they would meet the estimates he reportedly said quote: you know how to fix these numbers now go back to your office and do it unquote beam and his accounting team comply with scratchy's Orders, one of their main methods of fraud was accounts receivable when the hospital bills, patients.

Inevitably some of the bills, go unpaid by intentionally underestimating the unpaid bills, they could boost profitability. They would also misclassify expenses and capital purchases to avoid reporting them on the income statement. All of the acquisitions, the company, did also helped out tremendously with the fraud merger accounting is extremely complicated, which is perfect for accounting fraud. They could manipulate the intangible assets associated with the mergers to make net profit whatever they wanted it to be, because the numbers were so convoluted.

It was very difficult for the auditors to detect irregularities from 1996 to 2002 health, south reported 2.7 billion dollars of fake profits. In reality, the business was barely breaking even in many quarters. The reported profits were so much higher than their actual profits that their corporate tax bill was larger than their real pre-tax profits by the early 2000s. Some analysts on wall street were starting to get suspicious of health south, despite the fact that they were posting hundreds of millions of dollars worth of profits on an annual basis.

Their cash balances weren't increasing commensurately, as it would later turn out even what little cash they did have on. Their balance sheet was fake. At the peak of the fraud they reported 275 million dollars of cash on their balance sheet. They actually only had 25 million dollars in corporate bank accounts, but by 2002 the house of cards had gotten too big they'd accumulated so much fake profits that they continued to add more to it.

It became obvious to their auditors that something fishy was going on in 2002. They had no choice but to announce a large quarterly loss which sent the stock price tanking. Richard scrushi sold 75 million dollars worth of stock just a few days before the earnings release. This large insider sale caught the attention of the sec.

The timing was suspicious and they opened up an insider trading investigation. Many industry observers had thought that health sales accounting was suspicious for quite some time. In light of scrutiny's stock sale, the sec had enough evidence to raid the company's corporate headquarters to investigate the potential fraud in the office. They found evidence of thousands of fraudulent accounting entries made to exaggerate the company's earnings and meet shareholder expectations.

They charged scrushi as being the mastermind of the plot directing company employees to falsify accounts on this news. The stock price fell to below one dollar, and most people thought that the company would go bankrupt. The board of directors called a desperate meeting. The company was running out of cash.

Now that the fraud was exposed, it was very difficult for them to raise capital from outside investors. At the current rate of cash burn, they would be forced to file for bankruptcy protection in a matter of months. Their first order of business was to terminate scrushi as well as the cfo who were both involved in the fraud. They hired alvarez marshall, a consulting firm specializing in distressed situations to restructure their finances to stave off bankruptcy.

They cut corporate expenses to the bone they sold most of the company's corporate aircraft, which included a gulfstream 5 private jet and a sikorsky helicopter. They also halted construction of the digital hospital joint venture with oracle that scratchy started just two years earlier impressively. The new leadership team was able to restructure their liabilities and avoided filing for bankruptcy. They rebranded as encompass health and divested many of the acquisitions that scrushi did in the 90s since the fraud was exposed.

The stock price has made a strong rebound and is up almost 100 fold from the lows. However, it is still much lower than its peak of 150 at the height of the fraud after he was indicted, scrushi was released on bail. He claimed his cfos were cooking the books behind his back without his knowledge or consent, and he vigorously maintained his innocence. Michael martin, chief financial officer, let me read from the court transcript when he pled guilty.

The judge asked michael martin: did you and mr screw she discuss the fact the numbers contained in the filings were false. Yes, sir, did mr scrushy direct you to do something with the numbers? Yes, sir, he told me to inflate the numbers to fix the numbers so that they met wall. Street's expectations, so is mike martin, just a dummy, just some guy says: go, do something to commit a fraud or a crime that will put you in jail and mike martin just does it. You don't believe that mike.

I would never have done that. He is not telling the truth tad mcveigh cfo until early this year, 2003 pled guilty told the judge richard screw. She was aware that the financial statement contained numbers that were incorrect. This is again that's not true.

I have an e. I have an e: all these guys are liars and you are knight in shining armor mike they're, 50 000 people they're five. You have five people that have made these claims out of 50 000 people. Let me make a comment but you're in charge.

I mean come on you're the you. Oh i mean i'm, it doesn't matter richard. No, i did not. I did not.

No, no. This you're, not right mcveigh, told the judge. You tried to justify it by saying: quote: all companies play games with accounting. I never said that to him, and he knows that.

Why would these chief financial officers, what you're saying is they committed the fraud? For what reason i didn't, i certainly didn't commit the fraud. People know me. They know i wouldn't instruct somebody to do that. What would be the motive of your cfos to commit a fraud? I really don't want to get into the deal, but there is every one of them has a motive, but then he did tell us what he believes motivated his cfos to falsely inflate earnings, promotions bonuses, stock stock options, an opportunity to make a lot of money.

There's incentives in it tremendous incentives, power greed, there's a lot of reasons for what they did. There was no motive for me to destroy a great company that i built a company that i loved my fourth child. There was no reason for me to do that. It seems quite far-fetched that five different cfos, who served at different times, conspired together to commit a massive fraud while a ceo was completely oblivious, while the cfos did benefit from bonuses and stock options, while the fraud was going on, skrushi's benefit was much greater before the Trial he became a televangelist.

He created a christian tv, show called viewpoint with his wife, where he talked about their christian faith. Many viewed this as a desperate attempt to gain favor with the jurors alabama is a very religious state. He probably figured that the jurors would be more lenient on him if they thought that he was a god-fearing man. His gimmick appeared to work and in 2005 he was shockingly acquitted on all charges relating to the fraud.

However, many lower level executives faced steep prison sentences, but prosecutors weren't going to give up so easily. They were able to indict scratchy on an unrelated crime. He paid 500 000 in bribes to alabama governor don siegelman in exchange. Scrushi was appointed to the state's certificate of need review board, which is responsible for approving new hospital construction.

In 2006, scrushi and former governor siegelman were convicted for bribery. Skrushi was sentenced to six years and 10 months in federal prison. He was released from federal custody in 2012 and now works as a business and inspirational speaker, alright, guys that wraps it up for this video. What do you think about richard scrushy? Do you believe that he was innocent? Let us know in the comments section below, if you enjoyed this content, make sure to hit that like button and subscribe, so you don't miss future uploads as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.