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Friday, February 25, 2005

Witness: Scrushy Advised 'Hang in There'

Fired HealthSouth CEO Richard Scrushy gave a pep talk to a subordinate involved in a scheme to inflate earnings at the rehabilitation giant, instructing him to "hang in there," according to testimony at Scrushy's trial.

Former assistant controller Ken Livesay, one of 15 executives to plead guilty in the scheme, said Thursday that Scrushy told him: "We're not going to have to do this forever."

But Scrushy didn't explicitly mention fraud, Livesay said. The testimony came on his second day on the stand at Scrushy's trial on corporate fraud charges.

By early 1999, after about 2 1/2 years of inserting bogus numbers into HealthSouth's books to inflate earnings, Livesay said he had developed psoriasis linked to stress. He said then-finance chief Mike Martin arranged a meeting for him with Scrushy.

Livesay said Scrushy told him: "`I know you've been working hard, I really appreciate it. We're not going to have to do this forever.'"

Scrushy talked about a plan to sell HealthSouth and said they would all "make a lot of money."

"`We can all go to the lake and retire,'" Scrushy said, according to Livesay.

Livesay left the accounting department and moved to information technology in late 1999, but he said he was aware that the fraud was continuing. Livesay didn't go to the government until after the fraud became public in March 2003.

Livesay said he confirmed the fraud to two colleagues who grew suspicious but weren't involved in the conspiracy, Leif Murphy and Diana Henze, but previous testimony showed neither reported the scheme to prosecutors. Both Murphy and Henze testified against Scrushy earlier.

Livesay also corroborated testimony by former chief financial officer Bill Owens, saying he heard Scrushy talk about getting back to "accurate numbers" in a conversation where he told Owens how to answer questions from an investigator with the Securities and Exchange Commission.

During cross-examination, defense lawyer Art Leach asked why Livesay failed to report his concerns about the scheme to HealthSouth's corporate compliance staff or to Scrushy himself after the fraud swelled beyond $600 million in 1998.

"I ask myself that question a lot," said Livesay.

But, Livesay added, there was concern within the company about "the potential of losing your job if you confronted Mr. Scrushy about this." Livesay said he got "four or five" promotions with raises and more than $1 million in stock options while involved in the crime.

Prosecutors claim Scrushy was behind a conspiracy to inflate HealthSouth earnings by some $2.7 billion for seven years beginning in 1996. He is accused of making millions off the scam through stock sales, bonuses and salary.

The defense argues subordinates committed the fraud on their own and lied to Scrushy for years to keep it hidden.

In describing the nuts and bolts of the fraud, Livesay said HealthSouth paid so much in taxes on bogus income it had to borrow money to make ends meet.

Livesay said he prepared a report in mid-1998 showing the rehabilitation giant had to pay $145 million in taxes on false income of $407 million when its real income was only $160 million.

"We weren't making enough money to pay our income taxes," he said.

Speaking slowly and deliberately, Livesay said he showed the document to Martin, who had asked him why the company was still borrowing so much money.

"It was like a light bulb went off in his head," Livesay said of Martin. "He grabbed the schedule from me and said, `I've got to show this to Richard,' and he walked out of the office."

Livesay did not say if he knew whether Scrushy actually saw the document.

Livesay, Martin, Owens and 12 other former HealthSouth executives have pleaded guilty and are cooperating with prosecutors. Livesay was ordered to pay $760,000 in restitution and fines but avoided jail time.

Scrushy is charged with conspiracy, fraud, money laundering, obstruction of justice and perjury. He also is charged with false corporate reporting in the first test of the 2002 Sarbanes-Oxley Act against a chief executive.

If convicted, Scrushy could receive what amounts to a life sentence and be ordered to forfeit as much as $278 million in assets.

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