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Tuesday, March 01, 2005

Third Former CFO Links Scrushy to Fraud

Fired HealthSouth Corp. CEO Richard Scrushy was impressed by the fraudulent ingenuity of other executives and approved their plan to overstate earnings at the rehabilitation center operator, a third former finance executive testified.

Mike Martin said Scrushy was pleased with a plan by Martin and former finance chief Bill Owens to wrongly put $300 million of HealthSouth expenses on the books of Horizon CMS during a merger in 1997. The transaction helped further the scheme to overstate earnings, Martin said Monday.

"He said, 'Damn, you guys are good,'" Martin said. Martin is one of 15 former HealthSouth executives to plead guilty to the fraud.

That same year, Martin said, he and Scrushy sold millions worth of HealthSouth stock despite knowing the company was "significantly missing Wall Street expectations." Martin said he got rid of $3 million worth of shares, and Scrushy sold more than $100 million in stock.

"Even though we knew we were committing fraud, we felt it was important to keep the stock price up for at least a year" to avoid shareholder lawsuits, said Martin, with Scrushy seated just a few feet away at the defense table.

Martin's testimony came late in the day at the start of what will likely be an extended stay on the witness stand. The defense will cross-examine him later.

Owens and HealthSouth's first CFO, Aaron Beam, previously testified that Scrushy was part of what prosecutors describe as a conspiracy to overstate earnings by some $2.7 billion for seven years beginning in 1996. Owens and Beam also have pleaded guilty.

The defense claims the former CFOs and other subordinates used lies to hide the fraud from Scrushy, allowing them to earn more money as they climbed the corporate ladder.

Before Martin began testifying, another prosecution witness put the fraud into military terms, describing Scrushy as the powerful commander in chief of a rehabilitation chain relying on "covert operations" to meet Wall Street forecasts.

"It was just inconceivable that something this massive was going on without his knowledge," said Ken Livesay, a former assistant controller who pleaded guilty.

The depiction was at odds with defense attempts to portray Owens as the mastermind of the conspiracy.

Under prosecution questioning, Livesay described Scrushy as an intimidating leader no one would cross. Scrushy worked hard, was "incredibly talented and gifted" and could "achieve anything he set his mind to," Livesay said.

"Mr. Scrushy was the commander in chief. He had some generals who reported to him, and he had some captains, and he had a lot of lieutenants. I was a lieutenant," said Livesay.

Livesay said his role in the fraud - finding accounts in which to hide millions in bogus numbers each quarter - amounted to "covert operations."

"When something came to me, I had no reason not to believe it wasn't coming from the commander," said Livesay.

Defense lawyer Art Leach challenged Livesay's military comparison, pointing out that Livesay had access to Scrushy - something no lieutenant has with the president. Leach also referred to the My Lai massacre of 1968, in which U.S. troops claimed they were following orders when they killed more than 300 civilians in Vietnam.

"Are you aware an illegal order does not have to be carried out by the troops?" Leach asked.

"I am aware of that," said Livesay, who spent four days on the stand.

In cross-examination of Livesay, Leach brought out that it was Owens who first came up with the idea of inflating HealthSouth's fixed-asset accounts as an audit loomed.

"We had run out of ideas," said Livesay. "We had a problem on the balance sheet of more than $400 million if we were going to make it through that audit."

To make it possible to hide fraud in fixed-asset accounts, Livesay said, Owens brought more people into the conspiracy.

Livesay said he briefly served as a director of a charitable organization that got $50,000 from Scrushy and some $400,000 from city and state governments, but he was "fired" after questioning whether the foundation's money was being wrongly used for personal and political expenditures.

Free on $10 million bond, Scrushy is accused of conspiracy, fraud, money laundering, obstruction of justice, perjury and false corporate reporting in the first case of a CEO being charged with violating the Sarbanes-Oxley Act.

Scrushy could receive what amounts to a life sentence and have to forfeit as much as $278 million in assets if convicted.

posted by Brian Moran @ 9:16 AM   1 comments

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