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Fifth Chief Financial Officer At HealthSouth To Admit Fraud

Apr 25, 2003 | Bloomberg News

A fifth former chief financial officer at HealthSouth agreed today to plead guilty to a fraud charge, federal prosecutors said.

The former financial officer, Aaron Beam, will plead guilty to one count of bank fraud for lying to lenders from April 1996 to October 1997, prosecutors said.

All five finance officers of the company, the nation's largest operator of rehabilitation hospitals, have been charged and are aiding prosecutors in their investigation of accounting fraud at the company, including what prosecutors say was the inflation of earnings by $2.5 billion.

"We now have every chief financial officer in the history of the company, and we now have a very clear picture of how accounting was handled from 1984 until March 2003, when investigation began," the United States attorney for the Northern District of Alabama, Alice Martin, said in an interview.

The Securities and Exchange Commission has accused Richard M. Scrushy, who was fired as chief executive, and the company of accounting fraud, asserting that they inflated earnings by $1.4 billion and assets by $800 million since 1999. Prosecutors have said officials exaggerated earnings by another $1.1 billion in 1997 and 1998.

According to court papers, Mr. Beam, 59, conspired with Mr. Scrushy and other senior officers to inflate HealthSouth's total and per-share earnings to meet Wall Street expectations. Mr. Beam prepared financial statements for the S.E.C. that misstated net income, revenue, assets and liabilities, the papers said.

Mr. Beam and Mr. Scrushy, who together started HealthSouth in 1984, gave those false statements to a syndicate of 32 lenders that amended a $1.25 billion line of credit to the company in April 1996, the papers said. One of those lenders, AmSouth Bancorporation in Alabama, lent $55 million, the papers said.

Mr. Beam's lawyer, Donald Briskman, could not be reached for comment. Mr. Beam is scheduled to enter his guilty plea on May 5, Ms. Martin said. Eleven former employees have signed plea agreements and are helping prosecutors, and eight have already entered guilty pleas in federal court.

Among those who have pleaded guilty are the former chief financial officers William T. Owens and Weston L. Smith, who have admitted to fraud and conspiracy. Two other former chief financial officers, Michael D. Martin and Malcolm E. McVay, have agreed to plead guilty at a future date in Birmingham.

Mr. Beam faces as much as 30 years in prison, although he very likely will be offered a lighter sentence for cooperating. Mr. Beam, who left the company in 1997, faced only a bank fraud charge because the statute of limitations on that crime is 10 years, Ms. Martin said. The conspiracy charge that the other chief financial officers pleaded guilty to has a five-year statute of limitations.

Mr. Scrushy, who is not charged with a crime, has denied wrongdoing and has blamed subordinates for the fraud.

The federal investigation is expanding into other areas outside the HealthSouth finance department, Ms. Martin said. She would not comment on whether auditors at Ernst & Young, the company's former outside accountants, were under investigation. "Ernst & Young is cooperating in our request for work papers and other documents," she said.

A federal judge in Birmingham held a 10th day of hearings today on the bid by Mr. Scrushy to gain access to $40 million in assets that were frozen after the S.E.C. filed an accounting fraud suit against him on March 19. The commission later added insider-trading accusations, asserting that Mr. Scrushy illegally sold $175 million in company stock.

At the hearing, Maron Webster, a former internal auditor at HealthSouth, testified that Mr. Scrushy fired him in 1989 after he questioned accounting at a company operation in Miami.

Mr. Webster said when he raised concerns about what he thought were improperly booked receivables, Mr. Scrushy said, "we're under certain pressures to make certain numbers," according to Mr. Webster's testimony. "We have an obligation to stockholders and shareholders."


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