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Third HealthSouth CFO Admits Fraud

Apr 8, 2003 | In the government's widening investigation into alleged accounting fraud at HealthSouth, Michael Martin, the company's finance chief from 1997 to 2000, agreed to plead guilty Tuesday to helping cook the books at the health-care giant.

Martin is the third CFO and ninth executive who worked at HealthSouth to reach a plea deal with the Justice Department within the past month.

In a twist, however, a federal judge would not accept the plea deal. Judge U.W. Clemon in Birmingham, Ala., criticized prosecutors for announcing a guilty plea before presenting it to the court.

As the Justice Department expands its criminal case, Martin's admission tightens the screws on Richard Scrushy, the ousted chairman and chief executive of HealthSouth who is alleged to have directed the accounting fraud. Through his attorney, Scrushy, who has not been charged, has denied any wrongdoing.

According to court papers, "the CEO would direct Martin and Owens [William T. Owens, a former HealthSouth CFO who also has pleaded guilty] to find ways to ensure that HealthSouth's earnings per share number met or exceeded Wall Street analyst expectations."

Martin, 42, began work in HealthSouth's accounting department in 1989, eventually rising to chief financial officer. He left HealthSouth in early 2000.

He was charged with conspiracy to commit wire and securities fraud as well as falsifying financial information.

"Mr. Martin's plea demonstrates you cannot leave a corporate fraud conspiracy by simply walking out the corporation's front door," said U.S. Attorney Alice Martin.

According to court papers filed by U.S. prosecutors, HealthSouth overstated its earnings by $2.5 billion since 1997.

The Securities and Exchange Commission, in a civil complaint, charged HealthSouth and Scrushy with inflating profits by $1.4 billion and assets by $800 million since 1999.

A court hearing is scheduled Wednesday to fashion an appropriate asset freeze for Scrushy, who is restricted to living expenses of $15,000 under an interim court order issued at the SEC's request.

The SEC is trying to preserve any ill-gotten gains from the alleged fraud.

It has subpoenaed documents concerning entities controlled by Scrushy's umbrella company Marin, which apparently pays the salaries of his household help and certain family members.

The SEC also seeks tax returns for employees at Scrushy's private companies. Marin's expenses are estimated to $600,000 per month, according to court papers.

Meanwhile Tuesday, HealthSouth announced new corporate governance guidelines aimed to strengthen its board of directors. The board was criticized for being a rubber stamp for Scrushy.

HealthSouth is scrambling to avert bankruptcy. Last week, the company's $1.25 billion credit line was frozen and it missed a $367 million bond payment.

Shares of HealthSouth last traded at 13 cents in over-the-counter trading.

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