A third former chief financial officer at HealthSouth Corp. agreed yesterday to plead guilty to charges arising from a widening accounting scandal as the health care giant released new corporate governance rules.
Michael Martin, who worked as CFO from October 1997 to February 2000, was charged with conspiracy to commit wire fraud and securities fraud, and with falsifying financial information.
Martin, 42, of Birmingham struck a plea deal and is cooperating with authorities investigating the company, U.S. Attorney Alice H. Martin said at a news conference.
The prosecutor, who is not related to the former executive, said Martin’s departure from HealthSouth three years ago was related to the accounting fraud, but she declined to elaborate.
“Mr. Martin’s plea demonstrates you cannot leave a corporate fraud conspiracy by simply walking out the corporation’s front door,” she said.
The former CFO was scheduled to enter the guilty plea before U.S. District Judge U.W. Clemon yesterday afternoon. But Clemon refused to accept the plea, complaining in court that the time of the plea hearing was made public before he even knew he had the case.
“That’s not the way our system is supposed to work,” Clemon said.
Clemon said he refused the plea because he wanted to avoid the impression that he was “part of the prosecutorial team.” He said he would schedule a hearing later.
Meanwhile – partly in answer to criticism that former HealthSouth Chief Executive Officer Richard M. Scrushy held too much sway with directors – the medical services company said its board had approved new rules requiring most directors to be independent from management and invest at least $100,000 in HealthSouth stock.
The independent directors must meet without management directors at least twice annually, and such gatherings must be led by a nonmanagement director. The board also established an annual review process for itself.
HealthSouth spokesman Andy Brimmer said the new rules were in line with the Sarbanes-Oxley Act, the corporate reform law Congress passed last year, and rules of the New York Stock Exchange. The exchange is seeking to delist HealthSouth stock, which sold over the counter for 12.5 cents yesterday.
Eight former HealthSouth executives, including former CFOs Weston Smith and William T. Owens, have pleaded guilty and are cooperating with the government, which says the company overstated earnings by $2.5 billion since 1997 to meet Wall Street expectations.
Scrushy, fired last week as chief executive and chairman, is the target of a criminal investigation. He has denied wrongdoing and has ignored the company’s request to resign from the board, which is elected by shareholders. Owens also has not responded to the company’s call for his resignation as a director.
The prosecutor said she has met with Scrushy’s lawyers but would not reveal the nature of the talks.
Michael Martin went to work at HealthSouth in 1989, working in the accounting department in various jobs before his promotion and departure.
The charges accuse Martin of following orders from Scrushy to make sure the company’s earnings met Wall Street’s expectations, thereby enriching himself and others.
While some corporations accused in fraud cases kept two sets of books one real and the other bogus the prosecutor said there was no indication of such a practice at HealthSouth.
Rather, Alice Martin said, HealthSouth officials would make coded entries when falsifying accounts. Forensic auditors and some of the executives who have pleaded guilty will attempt to reconstruct the company’s finances accurately, the prosecutor said.
HealthSouth has said its financial documents can no longer be relied upon.
The company missed bond and interest payments totaling $367 million last week and said it was in talks with creditors seeking more time. The company has publicly discussed bankruptcy as a possibility.
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