Represented by Sullivan & Cromwell, UBS faced potentially billions in compensatory and punitive damages if plaintiffs would have proven that the Swiss banking giant was aware of the $2.7 billion accounting fraud that occurred under former HealthSouth CEO Richard Scrushy. (Scrushy currently is serving an 82-month prison sentence on separate charges of bribery and obstruction of justice. Check out reporter Ben Hallman's feature story from the February 2007 edition of The American Lawyer to get the full rundown on the Scrushy saga.)
"This settlement represents another milestone in HealthSouth's recovery of damages sustained by the company under prior management," said general counsel John Whittington in a statement.
After revelations of accounting fraud at the Birmingham-based health care services provider surfaced in 2003, shareholders filed hundreds of civil suits against the company, its auditors at Ernst & Young, its bankers at UBS, and Scrushy. HealthSouth agreed to pay $445 million in February 2006 to settle investor suits against the company, but claims remained against the other defendants in state and federal courts.
The settlement announced Friday covers claims against UBS filed in Alabama's 10th Judicial Circuit, which includes Birmingham. Under the terms of the agreement, HealthSouth will be required to pay attorneys fees for the derivative plaintiffs after they are approved by the court. After deducting costs and expenses related to the state litigation, 25 percent of the remaining proceeds will be paid to plaintiffs in the federal securities litigation. HealthSouth says that whatever is left will be used to pay down the company's long-term debt.
Lead counsel for the derivative plaintiffs is John Hale of Birmingham's Hare, Wynn, Newell & Newton. Skadden, Arps, Slate, Meagher & Flom has represented HealthSouth in the past, but was conflicted out of settlement negotiations with UBS. As a result, Julia Cooper and David Hymer, litigators with Birmingham's Bradley Arant Rose & White, stepped in to represent the company. (Cooper and Haley did not return requests for comment.)
S&C litigation partners Robert Giuffra, Jr., Brian Frawley, Michael Tomaino, Jr., Jeffrey Scott, and Julia Jordan represented UBS. Local counsel was provided by W. Michael Atchison and Samuel Franklin, founding partners of Birmingham's Starnes & Atchison and Lightfoot, Franklin & White, respectively. The Zurich-based bank's insurance carriers will fund the settlement.
As part of the settlement, UBS will waive a $33 million judgment currently before the 2nd U.S. Circuit Court of Appeals in New York that the bank won against HealthSouth for defaulting on a loan. UBS still faces a securities class action by HealthSouth shareholders in U.S. district court in Birmingham. A class has not yet been certified.
The settlement requires court approval, which HealthSouth expects will happen sometime in the next 60 days. Claims against Scrushy, Ernst & Young, and several other defendants are not affected by the agreement.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.