Louisiana Pension Group Forces Board Shakeup at HealthSouth
HealthSouth
Corp., the scandal-plagued health-care provider, settled a lawsuit
led by the Teachers' Retirement System of Louisiana
(TRSL) in an agreement that includes the phased departure of
five long-standing directors, as well as a leading role for
the TRSL in nominating four replacements.
HealthSouth also agreed to hold an annual meeting
no later than two months after its audited financial statements
are available, the company and pension group said separately.
The TRSL brought the lawsuit to force the Birmingham, Ala.-based
health services giant to call an annual meeting so shareholders
could try to oust "legacy" directors who sat on the
board while HealthSouth's alleged accounting fraud developed.
HealthSouth, whose last annual meeting was in May 2002, has
not called another meeting since it has not filed auditor-approved
financial statements.
Fifteen former HealthSouth executives have pleaded
guilty to helping run a scam that allegedly resulted in overstatement
of the company's earnings by some $2.7 billion to meet Wall
Street forecasts, according to the Associated Press. Former
chief executive Richard M. Scrushy was indicted for allegedly
directing the fraud. He has pleaded innocent and is free on
$10 million bond.
"We
are very happy with this settlement," TRSL General Counsel
Tommy Reeves said in a statement prepared by the group's outside
law firm, Grant & Eisenhofer P.A. "It
has been TRSL's goal to remove from the board those on whose
watch HealthSouth's problems occurred and replace them with
top-notch directors who have no conflicts of interest. This
settlement does that without exposing the company to any perceived
risk from a change in control."
The departing directors are Larry D. Striplin
Jr., Charles W. Newhall III, C. Sage Givens, George H. Strong
and John S. Chamberlin; all were members since at least 1999,
the AP reported. The transition plan called for two of them
to leave voluntarily by Dec. 15, 2003, another two by April
15, 2004, and the last one by Aug. 31, 2004, the two sides said.
Four new directors will replace the five departing
board members, the two sides said. A search will begin immediately,
overseen by a search committee comprising one member of HealthSouth's
nominating committee, a TRSL representative, and representatives
of up to three of HealthSouth's major institutional stockholders.
The search committee will recommend candidates to the nominating
committee to fill the vacancies "as soon as practicable."
The three directors who joined HealthSouth's board after August
2002 -- Jon F. Hanson, interim CEO Robert P. May and Lee S.
Hillman -- together with interim Chairman Joel C. Gordon, will
keep their seats.
The company said Gordon and May have agreed
to stay in their respective positions until the board's "special
committee" believes the turnaround is largely accomplished
and a permanent management team is in place. HealthSouth's special
committee consists of all HealthSouth's directors except Scrushy,
who has refused the board's request to resign.
During the transition, "significant"
action by the HealthSouth board will require an 80 percent vote
of directors, Grant & Eisenhofer said.
HealthSouth
is the nation's largest provider of outpatient surgery, diagnostic
imaging and rehabilitative health-care services, claiming nearly
1,700 locations. The TRSL, a public pension system representing
around 95,000 active members and 45,000 retirees, claims assets
of roughly $10.5 billion.
SEC
Proffers First Wave of Mutual Fund Reform Regulations
The SEC in early December presented the first
of many reform regulations aimed at the mutual fund industry,
including passing a requirement for chief compliance officers
who report to directors and proposing a "hard" 4 p.m.
Eastern cutoff for trading bids as well as greater disclosure
about fund portfolios.
The adopted and proposed measures, outlined
in November by SEC Chairman William H. Donaldson as part of
a package presented on Capitol Hill, come ahead of other deep
reforms such as beefed-up board independence requirements in
mid-January. The SEC regulations, concurrent with proposed legislation
in Congress, follow mutual fund scandals that have exposed alleged
favoritism and profiteering by insiders at the expense of long-term
shareholders.
"Our movement on down the pike here in
terms of governance will go a long way toward resolving part
of that problem and disclosure will go, as a companion piece,
a long way toward bringing out into the open some of these conflicts,"
Donaldson said at the end of the public meeting.
The compliance requirements already adopted
mandate funds and advisers to have compliance policies and systems,
to review them annually, and for a chief compliance officer
to report straight to fund directors. The rules take effect
nine months after publication in the Federal Register.
"This is a powerful tool," SEC staff
member Robert E. Plaze told the commissioners at a public meeting
Dec. 3. Fund boards are more interested in compliance than other
issues, he maintained, and the SEC has found in its enforcement
actions that fund management often tried to keep the board from
learning about potential problems.
"This is a reform with great potential,"
Commissioner Harvey J. Goldschmid said. "It's also quite
consistent with the basic themes in corporate governance reforms
everywhere, which is to get key information up the chain of
command ... to directors who can dispassionately decide and
avoid the wrongs that have occurred."
The commission also proposed a "hard"
4 p.m. Eastern deadline for trades to be received by funds or
their transfer or clearing agencies to combat late trading.
The requirement likely would impose a new cost and burden to
some shareholders and trade intermediaries who would have to
get their trades in earlier or be bumped to the next day, Division
of Investment Management Director Paul F. Roye acknowledged.
But most Main Street shareholders won't even notice because
they make their orders in automatic plans, he asserted.
The hard cutoff's downside was a point many
commissioners acknowledged also, but said the abuses highlighted
in recent scandals left them with little alternative. "I
would have preferred a less prescriptive approach, but the current
environment seems to require a hard and fast rule," Commissioner
Cynthia A. Glassman said. A public comment period concerning
this proposal, and seeking comments for alternatives, will run
for 45 days from publication in the Federal Register.
Finally, the SEC also proposed greater disclosure
requirements from funds about their portfolios, such as their
market timing policies, fair-valuation pricing practices, and
more details about who gets to know what and when about the
fund's holdings. The move is intended to "shed light"
on these practices for investors to better decide their fund
trading.
On Dec. 17, the SEC asked for comments on a
proposed rule that would require enhanced disclosure of breakpoint
discounts on front-end sales loads. The proposal would require
mutual funds to describe in the prospectus any arrangements
that result in breakpoints in sales loads and to provide a brief
summary of shareholder eligibility requirements. The comment
period ends February 13.
Donaldson also has outlined when the commission
will propose further mutual fund regulations. On Jan. 14, the
SEC will consider proposing a rule for fund managers to report
their personal trading in the funds they run, as well as requiring
the chairman and three-fourths of the directors of a board to
be independent. On Feb. 11, more regulations aimed at market
timing, such as a mandatory redemption fee, should be presented.
Other proposals regarding greater disclosure of fund fees and
broker compensation are expected to be rolled out between now
and Valentine's day.
"Clearly, we have a lot of work ahead of
us," he said.
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Looking Ahead: What's in Store for 2004
The
lawsuit brought by billionaire investor Kirk Kerkorian against
DaimlerChrysler AG over alleged fraud got underway
in front of U.S. District Judge Joseph Farnan in December. Kerkorian
is asking $1 billion in damages, the difference between the
price he received for his stake in Chrysler under a merger-of-equals
scenario and what he believes he should have received from a
takeover deal, Dow Jones Newswires said. Kerkorian is claiming
that what was styled a "merger of equals" was in fact
a takeover that harmed him and other investors. Exactly what
DaimlerChrysler executives meant by the term "merger of
equals" has been the subject of extensive testimony in
the U.S. District Court in Wilmington, where the case is being
tried, Dow Jones reported.