Two former chief financial officers at HealthSouth Corp. directly implicated founder Richard M. Scrushy in the company’s huge accounting scandal as they pleaded guilty Thursday.
Michael Martin and Tadd McVay told U.S. District Judge U.W. Clemon that Scrushy was involved in the scheme to inflate earnings. They made the statements while admitting to charges of conspiracy to commit fraud and filing false financial reports.
Federal investigators say HealthSouth’s earnings were overstated by about $2.5 billion dating back to 1997. In civil charges against the company and Scrushy, they allege he orchestrated the fraud to ensure earnings met Wall Street expectations as he amassed a personal fortune in stock and compensation.
Under questioning from Clemon, Martin said he and Scrushy first discussed falsifying numbers in 1993 when he was an executive in the accounting department.
“We were going to miss earnings and we had to make an acquisition to make it up,” said Martin, his voice cracking and his forehead beaded with sweat.
Martin, 42, was CFO from October 1997 through February 2000, and he said Scrushy told him to “fix” earnings shortfalls virtually every month during that time.
“If we weren’t making the numbers he would say, `Go figure it out,'” said Martin. Martin, a former treasurer, said he didn’t learn the amount of the overstatement until he became CFO.
Martin said Scrushy gave orders to misstate earnings in meetings that included himself; another former CFO who has pleaded guilty, William T. Owens; and an executive who has since left the company.
Martin said he eventually resigned from HealthSouth. “I ultimately became unwilling to engage in this behavior,” he said.
McVay said he, Scrushy and others discussed overstatements of cash on the company’s balance sheet last year after he became CFO, estimating the amount at between $200 million and $400 million.
McVay, 41, said he knew the company’s numbers were faked when he signed a financial report for the SEC in November.
Clemon asked McVay if he signed a false financial statement to enrich himself. McVay answered: “In the sense of keeping my job.”
McVay was CFO from August 2002 until January.
Scrushy, who has not been charged criminally, has denied knowledge of the fraud. But 11 former HealthSouth executives including all five CFOs the company has had have agreed to plead guilty in the fraud case. Scrushy formed the company with four others in 1984.
No sentencing date was set. Martin and McVay face possible maximum penalties of $1.25 million in fines and 15 years in prison, but are likely to receive lesser punishment because of their pleas and cooperation with investigators.
Scrushy’s lawyers contend Owens, who served as CFO twice since February 2000, engineered the fraud scheme in retaliation for a demotion in January. He also wanted to run the company, they claim.
Prosecutors have said they learned of the fraud when another former CFO, Weston Smith, came forward during an investigation of insider trading allegations against Scrushy.
The company’s first CFO and co-founder, Aaron Beam, agreed last week to plead guilty. A hearing is set for Monday for Beam, who served from 1984 until Martin took over in 1997.