Hours before an accounting scandal erupted at HealthSouth Corp. , Richard M. Scrushy, the since-ousted chairman and chief executive, advised his chief financial officer to “engineer your way out of what you engineered your way into,” according to a secret recording of the conversation played in court Thursday.
The tape of that conversation, between Mr. Scrushy and former HealthSouth finance chief William T. Owens, was played in U.S. District Court in Birmingham, Ala., where it was at the center of a contentious two-day hearing. Mr. Owens, who has pleaded guilty to fraud charges and is cooperating with the government, wore a recording device to help the Federal Bureau of Investigation make the tape.
But after hours of debate on whether to permit the recording to be played in open court, its full significance remained unclear. While the tape contains a series of tantalizing sentences and phrases, Mr. Scrushy’s comments are often muffled and it was often unclear what the men were discussing.
Lawyers for the Securities and Exchange Commission sought in the proceeding to extend a freeze on Mr. Scrushy’s access to his bank accounts and other assets, including cars, boats, and yachts. The judge didn’t rule on that issue Thursday.
The SEC is pursuing securities fraud and insider-trading charges against Mr. Scrushy. Separately, the Department of Justice is investigating accounting fraud at HealthSouth that so far totals $2.5 billion, according to court filings and plea agreements with former HealthSouth officials.
Much of the 11-minute recording, made on March 18, was inaudible to spectators in the courtroom. No transcript was made available by government prosecutors. In those portions of the tape in which Mr. Scrushy could be clearly heard, Messrs. Scrushy and Owens discussed whether to sign certain financial documents that were to be submitted to securities regulators imminently. It isn’t clear which documents they were discussing.
Later Mr. Scrushy said to Mr. Owens, “You ought to go down fighting.” At another point, Mr. Scrushy asked Mr. Owens what Mr. Owens would like to do. Mr. Owens replied, “Ideally it would be great to solve our problem. That’s going to take time.” Then the discussion returned to the issue of whether they should sign the documents.
At another point, Mr. Scrushy talked about the importance of the company and its employees and said, “Do we really want to trash this?”
Also Wednesday, HealthSouth said the company and its bank lenders have agreed on a forbearance on the company’s $1.25 billion credit line, through May 1. The company reported on March 27 it was in default of its credit agreement, due to the federal investigations of accounting fraud at HealthSouth. The agreement means the lenders are giving the company more time to get a better handle on its financial condition, and to continue talking with its lenders and creditors to resolve its liquidity crisis.
In another development, Justice Department deputy fraud chief Richard Smith, in a filing with the court, acknowledged for the first time that a federal grand jury in Birmingham is investigating HealthSouth, former and current employees and Mr. Scrushy.
During the hearing on the recording of Messrs. Scrushy and Owens, which began Wednesday and continued Thursday, Judge Inge Johnson heard hours of arguments from Mr. Scrushy’s attorneys, who challenged the admissibility of the recording, and evidence from the SEC and the FBI. Then, citing case law including one dating back to the Watergate era, the judge allowed a scratchy segment of the tape to be heard.
According to court testimony Thursday, the March 18 taping was conducted by FBI agents. The FBI wired Mr. Owens with a tiny digital recorder and Mr. Owens had conversations with Mr. Scrushy in the morning and late in the afternoon. Minutes after Mr. Owens finished the second conversation, FBI agents, who were waiting at a nearby shopping center armed with search warrants, swarmed into HealthSouth headquarters and began collecting computer records and files.
The next day, another former finance chief, Weston L. Smith, pleaded guilty to fraud, the first of nine former executives to do so. Mr. Owens, who joined the company in 1986 and became chief financial officer February 2000, pleaded guilty on March 27.