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Prepared Witness Testimony The House Committee on Energy and Commerce
The Financial Collapse of HealthSouth
Subcommittee on Oversight and Investigations
Mr. Howard Capek
Mr. Chairman, members of the House Committee on Energy and Commerce, my name is Howard Capek. Until July of this year, I served as a Managing Director in UBS AG's Equity Research department. I began my equity research career after earning a master's of business administration from the Johnson Graduate School of Management at Cornell University in 1993. Upon graduation, I joined Merrill Lynch as a healthcare research associate and was soon promoted to assistant vice president, working under one of that firm's senior analysts. I later joined Credit Suisse First Boston as a senior associate, after following the senior analyst with whom I had worked at Merrill Lynch. I was promoted to vice president in December of 1996, and in March of 1998, upon the departure of my superior, was named senior analyst following healthcare providers. I joined UBS in May of 1999 as an executive director, providing research coverage to institutional investors on long-term care and alternate site healthcare providers. I was promoted to Managing Director in December of 2001. Over the past three years, I've expanded my research coverage to 35 companies across five health care sectors, including drug wholesalers and specialty distributors, prescription drug benefit managers, contract research organizations, alternate site providers and healthcare real estate investment trusts. When UBS completed its acquisition of Paine Webber in November 2001, I also began providing my research to retail shareholders. During my time at UBS, I was consistently ranked in the top quartile among the approximately 75 analysts in the research department by the UBS institutional sales, trading and retail departments and research management. I was also ranked top 10 in categories of stock-picking, responsiveness to clients, and sector knowledge. In addition, I was ranked top-5 in stock picking by The Wall Street Journal 2002 all-star survey, a poll compiled solely on objective criteria. Over the last two and one-half year period, as well as the individual analyzed periods (calendar 2001, 2002, and the first six months of 2003), my buy-rated stocks have outperformed the major market and healthcare indices. Of course, none of this meant that my stock picking was right all the time. However, I do believe it meant that the quantitative approach I took to analyzing stocks was beneficial to UBS clients. These clients felt comfortable using my research reports and earnings models to help them anticipate how a company might perform in the future, thereby contributing to their investment decision making process. As with all equity stock market investing, no return can be guaranteed. Any of a thousand uncertainties can change anticipated return outcomes and the validity or success of any business model or bundle of assets. One of the greatest uncertainties involves the human element, the management of a company. Senior managers make decisions that can affect the value and profitability of a company and they also control a great deal of what the outside world gets to see. As with any member of the investing public, analysts must rely on the honesty, accuracy and completeness of audited and unaudited information that a firm's senior management team regularly makes available to the public. My exposure to Healthsouth began while working at Merrill Lynch under Lucy Olwell, a top ranked analyst in the healthcare sector. Lucy decided to pick up coverage of the company in the mid 1990's, because it was a significant factor in several healthcare services sectors and because its large market capitalization made it one of the biggest such firms. We continued coverage of Healthsouth when the two of us moved to CSFB from Merrill, and I took over Ms. Olwell's portfolio of coverage, including Healthsouth, following her departure from CSFB in 1998. Throughout much of the period I covered Healthsouth, I rated the stock a buy or strong buy. Throughout my entire career my ratings on every stock that I had covered were based on potential appreciation to a price target that I would expect the stock to eventually reach, typically one-year into the future. My price targets were derived from my projections of a firm's future cash flows and relative sector returns and cost of capital. My projections and modeling were ultimately based on audited financial information that was publicly available and whatever information Healthsouth management and their investor relations department routinely conveyed to me and the investment community. One challenge that any analyst faces is supporting an investment thesis or recommendation over the long-term, despite short-term fluctuations in a stock, which can make those recommendations seem counterintuitive, particularly in retrospect. If an analyst were to change recommendations with trading momentum, he would inevitably be perceived as reactive rather than proactive, and would quickly become less valuable to his clients. Although there were times where the stock price performance of Healthsouth ran counter to my recommendations, I maintained that in the long term, the company's value would be better recognized. Indeed, from February 2000 through mid 2002, Healthsouth stock price performance supported this view. With the benefit of hindsight, we now know that a significant portion of Healthsouth's financial history was predicated on fraud. Had I known this at any time, not only would I have never assigned it a positive rating, I would have dropped coverage of the company. For the many analysts in the sector that had positive ratings on Healthsouth, including myself, I do not believe that any of the operating changes and volatility that occurred from time to time in any way foretold the nature or magnitude of fraud that took place. Another concern the Committee has raised in its investigation of the Healthsouth matter is the potential for conflict between investment banks and their stock research departments. Prior to the recent Wall Street settlements, a research analyst job description included, if not required, regular interaction and discussion with investment bankers. At times, such discussions gave bankers the opportunity to suggest coverage of certain stocks and required research analysts be available to lend their opinions on potential corporate transactions that involved banking services. That said, my record shows that the final word on coverage and ratings always fell first and foremost to my analysis and sector coverage considerations, and that my recommendations, based on quantifiable expected price targets, were always appropriate, unconflicted and fair. At any point while a company I covered was on a "restricted list," that is to say where I was not permitted to publish research coverage due to investment banking, my interaction with clients complied with what I understood to be Firm policies at the time. The two widely publicized emails, which were taken grossly out of context by the media, were consistent with my understanding of UBS policy at that time. Members of the Committee, what I have tried to demonstrate in these remarks is that, despite short term trends sometimes defying my recommendations; despite the challenges in maintaining continuity in research when dealing with restrictions imposed by investment banking; and despite the many uncertainties associated with stock picking, my efforts as an analyst have led to what I believe was an unbiased, modeled approach to research that benefited my clients in making their investment decisions. Throughout my entire career as an analyst, my intentions have been honest, my opinions have been independent and my actions have been proper.
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