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Monday, February 07, 2005
HealthSouth fraud unraveled under SOX
BIRMINGHAM, Ala. - The massive fraud at HealthSouth Corp. began unraveling days after President Bush signed a new law with stiff penalties for false corporate reporting, according to testimony Friday by a former finance chief at the trial of fired CEO Richard Scrushy.
Bill Owens, who served in several top positions at the rehabilitation giant, said then-chief financial officer Weston Smith told him he was quitting on Aug. 5, 2002, rather than sign bogus financial statements under the Sarbanes-Oxley law, enacted less than a week earlier amid a wave of corporate scandals.
"He said he just couldn't sign the certifications and was quitting," said Owens.
Owens said he and Scrushy - the first chief executive tried under the law - tried to come up with a way to keep Smith "on the reservation" and get him to sign the financial reports, which Smith knew were fraudulent.
In a hastily arranged meeting, Owens said he and Scrushy decided to end the fraud and blame the subsequent earnings decline on new Medicare rules. Owens said they also decided to split HealthSouth in two as a "diversion" and to put Smith in the surgical division, where accounts were "clean."
Owens said he laid out the plan during a meeting in Smith's car as Smith drove him around on Interstate 459 for a couple of hours.
"I told (Smith) this gave us a fighting chance, that we could get things fixed and nobody would have to get hurt," said Owens.
The next day, after meeting with Scrushy, Smith agreed to sign the certification and become chief financial officer of the new surgical division, Owens said.
Seven months later, in March 2003, Smith became the first of 15 HealthSouth executives to plead guilty in what prosecutors describe as a scheme to overstate earnings by more than $2.6 billion. Among other things, Smith pleaded guilty to signing false statements under Sarbanes-Oxley on Aug. 14, 2002.
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