The first HealthSouth executive to plead guilty in a $2.5 billion accounting fraud identified Richard Scrushy Thursday as the CEO who oversaw the scheme to inflate company earnings.
Former Chief Financial Officer Weston Smith listened as Securities and Exchange Commission lawyer Bill Hicks read from court documents stating Smith, along with the CEO and other senior executives, agreed to engage in falsifying earnings.
When Hicks asked “Who was the CEO at that time?”
Smith responded, “Richard Scrushy.”
But defense lawyers maintain Scrushy, who faces no criminal charges, has not violated any securities law and was unaware of any financial manipulation at the nation’s largest operator of outpatient surgery and rehabilitation centers.
The defense, during the seventh day of the hearing regarding Scrushy’s assets, continued its assertion that Bill Owens, another former chief financial officer who spent a brief stint late last year as CEO, was the mastermind behind the fraud and was trying to overthrow Scrushy as board chairman.
Defense lawyer Tom Sjoblom, when questioning Smith, described Owens as a sort of godfather of a secret gang that manipulated financial reports.
“(Owens) is the don of this family,” Sjoblom stated, evoking a chuckle from Smith. Sjoblom asked Smith if he found the hearing funny.
It was one of nearly 100 times when Smith responded to Sjoblom’s questions by asserting his Fifth Amendment right against self-incrimination.
Smith challenged the allegation that he, Owens and other executives were masterminding a plot to oust Scrushy.
Sjoblom asked Smith why he didn’t tell Scrushy, who hired him, there was an effort to oust him. Smith denied there was such a strategy.
“You knew about the coup?” Sjoblom asked.
“There was no coup,” Smith responded.
Sjoblom then asked Smith if there was a meeting at the home of Tadd McVay, an executive vice president and treasurer now on administrative leave, to discuss whether Scrushy should remain as chairman.
“I have no knowledge of that meeting,” Smith said.
Smith answered some questions lobbed by Sjoblom, who suggested Smith rose through the corporate ranks to a yearly salary of $325,000 and became disgruntled enough to join the coup when he was demoted from CFO to group vice president.
Sjoblom suggested Smith faced a salary cut of $200,000 as a result, but Smith said his salary did not change. Sjoblom also pointed out Smith was longtime friends with Owens and Ken Livesay, who also pleaded guilty, dating to their days of working at what is now Ernst & Young, HealthSouth’s former longtime outside auditor.
Smith acknowledged that Owens is godfather to his son.
Smith was one of four witnesses to testify Thursday at a hearing in which the SEC is asking a judge to block Scrushy’s access to his assets. The SEC wants the money available to pay any judgment in its civil lawsuit against Scrushy.
The SEC accuses Scrushy and HealthSouth in a March 19 lawsuit of instigating a fraud to falsify profits by $1.5 billion to inflate the value of the stock. A former executive has told investigators that another $1.1 billion was falsified.
Scrushy also faces SEC allegations of insider trading for selling $175 million in stock, which the SEC contends are ill-gotten gains artificially inflated by the accounting fraud. The SEC’s claim in the civil suit is for $786 million.
David McKnight, Smith’s attorney, said his client’s conscience led him to blow the whistle on the fraud at HealthSouth.
“He just couldn’t take it anymore and wanted to do the right thing,” he said.
McKnight said Smith offers no apologies about exposing the fraud.
“He has no regrets about coming forward and pleading to what he has done,” he said. “He is sorry for those who have lost their jobs” in the wake of the scandal.
Taking Fifth often:
Smith pleaded guilty to conspiracy to commit wire fraud, securities fraud and falsifying financial information filed with the SEC. He faces a sentence of up to 25 years in prison.
He is helping federal investigators put together a criminal case against Scrushy and is helping outline the fraud to them, McKnight said. He said his client has an open invitation to HealthSouth to help the corporation find the fraud on its books but so far HealthSouth has not taken him up on the offer.
McKnight said he advised Smith not to answer questions about the alleged coup of Scrushy as chairman, but said because his client knew of no such coup, it was OK to answer those questions.
On a day filled with interesting numbers, the most popular one Thursday was “the Fifth.”
Kay Morgan, a former finance executive who has admitted guilt in the fraud, and Livesay, a former assistant controller, followed up Smith’s string of invoking his Fifth Amendment rights
Livesay heeded the advice of his attorney, Thomas Spina, only answering a question to state his name and acknowledging a good morning from Sjoblom. Livesay declined to answer questions about his guilty plea from the judge.
They are among the eight former HealthSouth employees to plead guilty and cooperate with investigators. The guilty plea hearing for Michael Martin, a chief financial officer who left the company in 2000, has been rescheduled to April 25.
William Horton, executive vice president and corporate counsel for HealthSouth, testified he advised Scrushy to exercise some stock options set to expire last year.
In May 2002, Scrushy sold 5.28 million shares valued at about $76 million. The stock had an exercise price he paid of $3.78 per share and he sold them for an average of $14.05 per share, netting him $56.3 million before taxes.
That stock sale is among the ones the SEC has called into question.
Horton also refused to characterize Scrushy as an uninvolved executive, one of the contentions of Scrushy’s defense team.
“In our organization, Mr. Scrushy’s duties have been whatever he wanted them to be,” he said.
Horton was the last witness to testify Thursday. The hearing resumes Wednesday.
Smith had been expected in court Wednesday but his attorney said he did not receive the subpoena until Thursday.