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Scrushy Takes Fifth On Fraud Questions

Requests $70 million from frozen assets for living, lawyers, taxes

Apr 10, 2003 | Birmingham News

HealthSouth founder and fired CEO Richard Scrushy refused to answer a battery of questions in federal court Wednesday and asked to have access to $70 million of his assets.

Scrushy, acting on the advice of attorneys, invoked his Fifth Amendment right against self-incrimination during his first court appearance since he and the company were accused in a March 19 civil suit of falsifying profit to inflate the value of stock.

Testimony continues in a hearing today where the Securities and Exchange Commission is expected to play a secretly recorded conversation between Scrushy and a former chief financial officer.

When Bill Hicks, a SEC lawyer, asked questions Wednesday, Scrushy looked to his attorney who objected and spoke on Scrushy's behalf. Thomas Sjoblom of Washington said in court Scrushy would not answer incriminating questions "when a criminal indictment is just about to drop."

U.S. District Judge Inge Johnson March 25 granted Scrushy $15,000 in living expenses through Wednesday.

Scrushy wants a partial lifting of the freeze, seeking $70 million: $10 million in living expenses, $30 million in legal expenses and $30 million for tax payments.

Johnson left the freeze in "full force and effect" until the end of the hearing.

Hicks peppered Scrushy with at least 40 questions, asking if he signed false statements, whether he gave anyone instructions to inflate earnings and if it was true he owned 40 automobiles.

The judge, noting Scrushy discussed his sale of shares in a deposition, directed Scrushy to answer questions concerning the amount of HealthSouth stock he sold while employed there.

"I can't recall exactly," Scrushy said.

When showed documents to refresh his memory, Scrushy said: "It looks inaccurate."

Asked if he would fire an employee for doctoring financial statements, Scrushy's attorneys allowed him to answer "Yes."

The SEC also accuses Scrushy of selling shares based on insider information. The SEC presented six witnesses in its bid to keep Scrushy's assets frozen.

Already, eight former executives, including fired financial chiefs Bill Owens and Weston Smith, have pleaded guilty to taking part in an accounting fraud conspiracy, implicating Scrushy, and are cooperating in a criminal investigation. Michael Martin, former chief financial officer, has agreed to plead guilty.

Scrushy's attorney, Donald Watkins, said earlier Scrushy has done no wrong. Watkins declined comment Wednesday.

On Wednesday, Scrushy refused to answer questions concerning Owens and Tadd McVay, HealthSouth treasurer who was placed on administrative leave last week.

Scrushy also refused to answer whether McVay asked for a $500,000 bonus or certification contract before signing a financial document.

Scrushy was asked whether he knew that Owens' wife had concerns that if Owens kept signing phony financial statements he would end up in jail.

Hicks also asked Scrushy if he told Owens "his wife was right."

Hicks asked Scrushy if he told Owens that by cleaning up the company's books all at once, "he could get killed" and "he should go down fighting." SEC lawyers are expected this morning to present a recording captured between Owens, wearing an FBI device, and Scrushy in a March 18 conversation.

That same day agents served search warrants and interviewed employees at HealthSouth.

The attorneys called witnesses Wednesday to outline allegations of fraud and to justify why the assets should stay frozen. None of the witnesses implicated Scrushy.

The SEC witness that Scrushy's attorneys found most difficult to shake was Diana Henze, currently a vice president of Internet operations at HealthSouth but formerly a vice president of finance.

Henze, who came to work for HealthSouth in 1994 through its acquisition of ReLife, testified that she not only witnessed high-level executives committing what she thought was financial fraud, but also tried to report it to Owens and the company's compliance department.

After the books would be closed at the end of each quarter, finance executives asked her to allow for some adjustments to some of the entries. After those adjustments were made, Henze said she noticed earnings had changed dramatically, enough to boost earnings per share by a few cents.

She said she expressed her concerns to assistant controllers Ken Livesay and Emery Harris and even chief financial officers Owens and Martin, all of whom have pleaded guilty to criminal financial fraud charges and been fired.

Henze said Owens told her the earnings were being altered for the good of the company. He told her that if HealthSouth didn't make earnings, it would "affect the company and people will start losing their jobs."

`Intimidation factor':

Henze also claimed she was passed over for the job of assistant controller because she wouldn't go along with the fraud.

When asked by Sjoblom why she never took her suspicions directly to Scrushy, she cited an "intimidation factor and fear factor," and word in the company's halls were, "you could easily be terminated if you brought what sounded like bad news."

Henze wanted to be transferred out of the finance department because of her concerns. She has been in the information technology department since 2000.

Two former HealthSouth employees also outlined questionable accounting practices by the company.

Teresa Sanders, a former internal auditor at HealthSouth, said the company never let her audit the corporate books or even access its accounting software. Her audits were limited to the actual facilities HealthSouth operated, she said, and at one point even that was deemed to be off limits.

She said she told Tony Tanner, an original HealthSouth investor and former executive, CFO Martin and Aaron Beam, another original investor in HealthSouth, that she couldn't get to the books or software to do her job. Sanders said she eventually got to access the facility records again but was never able to look at the corporate books.

She, too, was asked by Sjoblom why she never told Scrushy about it. Even though her job was to report directly with Scrushy, she said numerous attempts to schedule a meeting with him failed.

Mike Vines, a former asset manager at HealthSouth, said he witnessed invoices being fabricated to fool the company's auditors.

Vines said his supervisor, Cathy Edwards, took an invoice he gave her from a medical facility HealthSouth operated in Massachusetts, scanned it into the computer, doctored it and generated a phony invoice for another HealthSouth facility in Kansas.

Edwards has also pleaded guilty, is cooperating with investigators and has lost her job at HealthSouth.

$4,999 items:

Vines said it was well-known among those in HealthSouth's finance departments that auditors Ernst & Young would not look at any item under $5,000 in value. He said he saw a number of items at $4,999 that were put on the books to avoid E&Y scrutiny.

Sjoblom asked Vines why he never called the company's fraud hot line or approached upper management. Sjoblom said Scrushy created a toll-free telephone number that was included in "Pulling the Wagon: Integrity In Action," the employee handbook.

Vines said he was afraid he would lose his job if he came forward.

"I was just doing my job," he said. "I was doing what I was instructed to do."

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