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Testimony Targets Scrushy

Apr 25, 2003 | AP

The interim chairman of HealthSouth Corp. testified against ousted CEO Richard Scrushy on Thursday, and a co-founder of the rehabilitation giant became the 11th person agreeing to plead guilty in a huge accounting fraud.

Scrushy was "closely involved in all facets of the company," said Joel C. Gordon, a director since 1996. His testimony contradicted defense arguments that Scrushy was a mere figurehead who knew little about HealthSouth's finances.

The Securities and Exchange Commission called Gordon to bolster its case against Scrushy, accused by the government of directing a scheme to overstate HealthSouth earnings by some $2.5billion since 1997.

Scrushy's lawyers have contended his top aide, William T. Owens, engineered the fraud and was demoted by the board because of an attempted "coup" to remove Scrushy. Gordon, however, said Owens was reassigned at Scrushy's request and only because the company canceled a planned corporate spinoff in January.

The testimony came in a federal court hearing in which Scrushy is seeking access to his personal millions, which U.S. District Judge Inge Johnson has temporarily frozen at the government's request.

The SEC, which filed a civil lawsuit against Scrushy and the company, contends HealthSouth has faked earnings since 1986, the year it went public and two years after it was formed.

Meanwhile, federal prosecutors said one of Scrushy's co-founders, former chief financial officer Aaron Beam, had agreed to plead guilty in the scheme.

Beam was accused of bank fraud for allegedly using bogus financial information to obtain loans from 32 lenders totaling $1.25billion in 1996 and 1997. Scrushy and others were in on the fraud, prosecutors said.

HealthSouth has had five CFOs, and now all of them have agreed to plead guilty. Beam was the longest serving, holding the position from 1984 until October 1997.

In the civil hearing, Gordon said he and other independent directors voted unanimously to fire Scrushy last month out of concern over HealthSouth's viability.

"We felt our responsibility was to make a change in management at that point," he said.

The company is now trying to sell its two hospitals in Birmingham and Coral Gables, to raise cash and avoid bankruptcy, he said. Outside of court, Gordon said he did not know whether the plan would work.

An assistant vice president for finance, Kelly Coleman, also testified that she heard in a meeting last summer that Scrushy had approved a plan to end the fraud by engineering a corporate spinoff, selling assets, and blaming a Medicare reimbursement change for a $175million earnings shortfall.

Coleman said the idea was revealed by former chief financial officer Weston Smith, the first of the 11 HealthSouth executives to agree to plead guilty to fraud charges.

"He said Richard was in support of the plan," said Coleman, referring to Scrushy.

Earlier, a former HealthSouth auditor testified he was fired by Scrushy after questioning accounting entries and asking to see the corporate books.

Neal Webster said Scrushy personally dismissed him in 1989 after explaining the rehabilitation company was under pressure to "make certain numbers" for shareholders.

"Who in the hell told you you could look at the corporate books?" Webster, of Columbiana, Ala., quoted Scrushy as saying angrily during a meeting in his office.

"I said, 'You did when you hired me,'" recalled Webster, adding that Scrushy fired him moments later.

Attorneys for Scrushy tried to discredit Webster, bringing out that he had a felony conviction for falsifying an address on a motorcycle title. Sjoblom suggested he really was fired for sexual harassment, a claim Webster laughed off.

Earlier, Emery Harris, who was vice president and assistant controller of the rehabilitation services giant, refused to answer questions about the fraud scam, in which he pleaded guilty and awaits sentencing. Harris invoked his Fifth Amendment right against self-incrimination 95 times.

HealthSouth calls itself as the largest U.S. provider of outpatient surgery, diagnostic and imaging and rehabilitative health care services. The company has nearly 1,700 facilities and 51,000 employees in every state and abroad.

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