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HealthSouth Replaces Directors Under Deal

December 2, 2003

BIRMINGHAM, Ala. (AP) _ HealthSouth Corp. has agreed to replace five longtime directors who were on the board when the health care giant became entangled in a huge accounting fraud.

The changes disclosed Tuesday will be made beginning this month under an agreement to settle a lawsuit filed by the teachers pension system in Louisiana, a major HealthSouth investor.

A lawyer for the $10.5 billion Teachers Retirement System of Louisiana said the fund’s goal was to remove the directors who presided over HealthSouth’s plunge into scandal.

``Regime change was desperately needed at HealthSouth,″ said Stuart Grant, a partner in a Delaware law firm that represented the fund.

The departing directors are Larry D. Striplin Jr., Charles W. Newhall III., C. Sage Givens, George H. Strong and John S. Chamberlin. All have been members since at least 1999 and all five will be off the board by Aug. 31, the company said.

Interim chairman Joel C. Gordon will remain along with three directors who joined the board after the company’s finances began unraveling: interim CEO Robert P. May, Jon F. Hanson and Lee S. Hillman.

Fired chief executive Richard Scrushy has refused the board’s call to resign and remains a director in name only.

Testifying before a congressional panel last month, Givens deflected blame from directors and said the company’s control systems failed to detect the fraud.

``Unfortunately, when high-level management conspires to commit a criminal act, I do not know of any corporate governance policy that would prevent such criminal behavior,″ said Givens, a director since 1985 and a longtime member of the board’s audit committee.

In a statement, HealthSouth said a search for four new directors will begin immediately. The board will shrink in size from 10 people to nine, and the Louisiana pension system and as many as three major institutional investors will have a say in the search for replacements.

Under the settlement, the company agreed to hold an annual meeting within 60 days of its next release of audited financial statements. HealthSouth canceled its last shareholders meeting as the scandal broke.

Scrushy is free on $10 million bond after being indicted on charges of directing a fraud that allegedly resulted in HealthSouth earnings being overstated by some $2.7 billion to meet Wall Street forecasts.

Scrushy has pleaded innocent, but 15 other former executives have pleaded guilty to charges of helping in the scam.

Prosectuors have said HealthSouth is cooperating with the investigation.

Based in Birmingham, HealthSouth is the largest U.S. provider of outpatient surgery, diagnostic imaging and rehabilitation services. The company has almost 1,700 sites in all 50 states and abroad.


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