HealthSouth Case Investigation. Fired HealthSouth CEO Richard Scrushy refused to answer questions Wednesday about claims of a $2.5 billion fraud at the rehabilitation giant, instead invoking his right to avoid self-incrimination.
Faced with more than 50 questions about his role in the alleged scheme and his personal finances, Scrushy sat mostly silent on the witness stand during the hearing in a federal courtroom.
Defense attorney Tom Sjoblom repeatedly cited Scrushy’s Fifth Amendment right in advising his client not to answer queries from Bill Hicks of the Securities and Exchange Commission.
Scrushy will be charged in a criminal indictment “that is about to drop,” Sjoblom told the judge. Eight former HealthSouth executives already have pleaded guilty, and a ninth has agreed to do so. U.S. Attorney Alice Martin declined to comment about whether Scrushy would be charged criminally.
Scrushy already has given a sworn statement in the case, and the government revealed it had a secret recording of him made by a former HealthSouth executive who is helping investigators.
The hearing, which will continue Thursday, was over whether Scrushy’s personal assets should remain frozen while the government investigates what it calls a massive accounting fraud at HealthSouth.
Government lawyers said Scrushy has requested about $10 million in living expenses, plus $60 million for legal fees and tax payments. Sjoblom wouldn’t let Scrushy tell Hicks why he needed so much money, but Scrushy’s lawyers did not contest the amount.
U.S. District Judge Inge Johnson issued no immediate ruling.
Only once did Sjoblom let Scrushy answer a question directly, offering no objection when Hicks asked whether he would have fired any employee who fraudulently altered HealthSouth accounts.
“Yes,” Scrushy said quietly.
After some legal wrangling, Scrushy also said he didn’t recall the value of HealthSouth stock he sold while with the company. The government contends it was worth about $175 million.
The hearing included testimony from a former HealthSouth accounting supervisor who said he became involved in the accounting fraud at the direction of his then-boss, vice president Cathy Edwards.
Michael Vines, who managed assets for about 500 HealthSouth facilities in the West, said Edwards instructed him to provide invoices which she then altered to make it appear the company had paid less for equipment than it really did.
Expenses were regularly transferred to capital accounts to make it appear the company was in better financial shape than it was, he testified.
Edwards is among the HealthSouth executives who have pleaded guilty and is assisting investigators. Vines said a government attorney told him he wouldn’t be charged in exchange for his testimony.
The government contends Scrushy directed Edwards and other executives to overstate earnings so HealthSouth’s performance would match Wall Street expectations. Sjoblom wouldn’t let Scrushy say whether the claim was true.
But laying out a possible defense, Sjoblom suggested Scrushy knew nothing about the fraud. He suggested Scrushy saw only consolidated financial statements and reports prepared by auditor Ernst & Young, which Vines said was deceived by the fake documents.
Sjoblom suggested that blame for the financial debacle rested with employees like Vines, who knew that numbers were being faked but never reported the fraud to a company hotline established by Scrushy.
“You were a good soldier, huh?” Sjoblom asked Vines.
“I was just doing my job,” Vines responded, saying he was afraid of possible retribution but kept assisting Edwards, who also had help from two other supervisors.
Also Wednesday, former assistant vice president for finance Diana Henze testified that she went to then-chief financial officer William T. Owens with suspicions about accounting fraud in spring 1999.
Henze said Owens, who has pleaded guilty to criminal fraud charges in the probe, told her changes had to be made to meet earnings forecasts to keep the company’s stock prices up or “people would lose their jobs.”
Henze said she was afraid of raising her concerns directly with Scrushy because she had heard rumors that he fired employees who “brought bad news or something he didn’t want to hear about.”
HealthSouth calls itself the nation’s largest provider of outpatient surgery, diagnostic and imaging and rehabilitative health care services, with almost 1,700 facilities in all 50 states and abroad. Founded in 1984, HealthSouth employs more than 51,000 people.