Federal prosecutors, wielding a tougher law against corporate fraud and the prospect of stiff prison sentences, secured a guilty plea from a second HealthSouth Corp. finance chief, ratcheting up the pressure on the company’s chairman and chief executive, Richard M. Scrushy.
William T. Owens, HealthSouth’s chief financial officer, pleaded guilty to fraud charges and faces a maximum of 20 years in prison for filing a false certification of financial statements with the Securities and Exchange Commission.
He faces additional prison time for two other charges. Last week, Weston L. Smith, a former chief financial officer at the Birmingham, Ala., company, pleaded guilty to similar charges of conspiracy to commit wire fraud and securities fraud. He faces a maximum of 10 years in prison for his false certification of results.
The Justice Department said these false-certification charges are the first under the Sarbanes-Oxley Act, which was passed last year in a bid to overhaul corporate governance after a slew of accounting scandals. The SEC, in a civil complaint last week, accused HealthSouth and Mr. Scrushy of overstating earnings by $1.4 billion since 1999. But government investigators contend the earnings manipulation began shortly after Mr. Scrushy took HealthSouth public in 1986.
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Mr. Scrushy could face similar criminal charges because he certified HealthSouth’s results. He couldn’t be reached for comment Wednesday. When asked by SEC attorneys earlier this month in a deposition about whether he ever instructed employees to change the company’s financial results, he replied, “Oh absolutely not.”
Meanwhile, according to people familiar with the situation, the Justice Department is also looking at Michael D. Martin, HealthSouth’s finance chief from 1997 until 2000, and his predecessor, Aaron Beam Jr., one of the company’s founders and chief financial officer from 1984 through 1997. Messrs. Martin and Beam couldn’t be reached for comment Wednesday.
Separately, the SEC is looking into the matter of HealthSouth’s shredding of some corporate documents this past fall, according to people close to the situation. The law firm of Fulbright & Jaworksi, which HealthSouth hired last year to conduct an investigation into allegations of insider trading by Mr. Scrushy and other company employees, sent the SEC a confidential report last fall about the shredding of documents they discovered, these people said. The law firm declined to comment Wednesday.
Michael Chertoff, U.S. assistant attorney general, dispatched two senior prosecutors to Birmingham last week with explicit instructions to “negotiate the toughest possible plea deals” with company executives, said a person close to the investigation. The government “wants to send a message to corporate America that we’re going to enforce the Sarbanes-Oxley provisions,” this person said.
Mr. Smith is facing a lighter sentence because he was the first to cooperate, said Alice H. Martin, U.S. attorney in Birmingham who is leading the federal criminal case. Mr. Owens, according to his plea agreement, also was more instrumental in crafting the accounting fraud at HealthSouth, a provider of outpatient surgery and rehabilitation services.
Ms. Martin urged employees who may have information to come forward quickly if they want to be treated with any leniency.
Ernie Knewitz, a spokesman for HealthSouth, declined to comment on the ongoing investigations.
The lawyer for Mr. Owens, Frederick Helmsing, said his client “regrets his conduct,” and that he hopes Mr. Owens will receive a reduced sentence because he is cooperating.
The charges against Mr. Owens provide new details on how Mr. Scrushy and HealthSouth’s senior finance team allegedly inflated earnings to match Wall Street expectations.
According to the new criminal charges, when Mr. Owens brought disappointing earnings numbers to Mr. Scrushy, the CEO “demanded that the reports be changed to meet or exceed” analysts’ expectations.
Mr. Owens, in his plea agreement, said Mr. Scrushy told him in 1997 to “continue falsifying HealthSouth’s books and records because [Mr. Scrushy] was planning on selling stock and he wanted to maintain the stock’s current level.” (Mr. Owens joined HealthSouth in 1986 shortly after the company went public and became finance chief in February 2000.)
In the investigation, a spokesman for Ernst & Young, HealthSouth’s auditors, said the accounting firm had received subpoenas from both the Justice Department and the SEC. He said the firm is cooperating and that neither agency “has informed Ernst & Young that the firm or any of its people are the subject or target of any investigation.”