Two former HealthSouth chief financial officers told a federal judge Thursday they participated in accounting fraud directed by ex-CEO Richard Scrushy.
Michael Martin, 42, and Tadd McVay, 41, entered guilty pleas before Chief U.S. District Judge U.W. Clemon in the accounting fraud conspiracy to inflate earnings and assets at HealthSouth. Federal officials said profits at the company were inflated by at least $2.5 billion.
Martin, his voice breaking, said he signed at the CEO’s direction financial reports that were sent to the Securities and Exchange Commission. Martin said he knew the numbers in the filings were bogus.
When Clemon asked if the CEO was Richard Scrushy, Martin said yes.
“Did you and Mr. Scrushy discuss the fact that the numbers contained in the filings were false?” Clemon asked.
“Yes sir,” Martin said.
Martin said Scrushy ordered the company’s numbers to be fixed so they would meet Wall Street expectations. He said the fraud dated to at least 1993. Martin became CFO in late 1997.
Martin said Scrushy gave directions to fix the numbers in front of other people, saying “you guys figure it out.” Martin said that he met with Scrushy virtually every month once he became CFO.
When Clemon asked Martin to identify other people present for the discussions, Martin’s attorney, Mark Hulkower, said he would direct his client not to voluntarily disclose the names.
But Clemon responded: “I’m now directing him to answer.”
Martin then identified Bill Owens, Weston Smith and Leif Murphy, an assistant treasurer. Owens and Smith, both former finance chiefs, have pleaded guilty in the fraud, and await sentencing.
Murphy, who left the company in September 1999, has not been charged. Efforts to reach him were unsuccessful Thursday.
Martin said he resigned in 2000 because he was unwilling to participate in the fraud anymore. He left HealthSouth and formed private companies Cannongate Partners, which handles investments, and Meadowbrook Healthcare, which bought four hospitals from HealthSouth in 2001.
McVay, who became CFO from August 2002 until January, said his only part in the crime was signing a HealthSouth financial report for the third quarter of 2002, knowing that prior numbers accompanying it were bogus. McVay, also a former corporate treasurer, said he was told the financial report he signed was the “only quarter that was clean in the history of the company.”
McVay told the judge he believed Scrushy knew the company’s financial numbers were incorrect because Scrushy told him that “he had bought numerous companies and all companies played games” with accounts. He said he had discussions with Scrushy before he signed the financial documents.
Scrushy, who faces a SEC fraud and insider trading lawsuit, has not been charged with a crime and is asking a judge to free his assets that were frozen shortly after the March 19 lawsuit. His defense team contends the sophisticated fraud was orchestrated by Owens and carried out by Scrushy’s subordinates without Scrushy’s knowledge.
Scrushy’s attorney, Donald Watkins, said Thursday’s testimony was designed to help government prosecutors nail Scrushy.
“We deny that the conversations they claim took place ever existed,” Watkins said, adding that neither of the men were subjected to cross-examination during the hearings. “We have evidence that will flatly contradict the testimony they have given. We think that when we finish our cross-examination of these witnesses they will have zero credibility.”
Thomas Sjoblom, another Scrushy lawyer, said it does not make sense that McVay would discuss the third quarter reports in 2002 with Scrushy because Owens was president and CEO.
“Something is drastically wrong with his story,” Sjoblom. “I think everybody is rushing in to make the best deals. They are saying things that logically make no sense.”
Sjoblom said Martin resigned only after Scrushy told him he would be fired.
Martin and McVay are among the 11 HealthSouth executives who have pleaded guilty or agreed to do so and help prosecutors in hopes of receiving leniency at sentencing.
So far, the government has secured plea agreements from five of the CFOs in HealthSouth’s history, including Martin and McVay. Aaron Beam, a former HealthSouth CFO and co-founder, is expected to plead guilty to bank fraud Monday.
Martin now faces up to 15 years in prison and $1.25 million in fines after pleading guilty to conspiracy, securities fraud and falsifying financial information.
McVay pleaded guilty to conspiracy to commit wire and securities fraud and false certification of financial information filed with the SEC. He faces a similar range of punishment.
Clemon said sentencing for the men would be set at a later date.