The acting chief executive of HealthSouth acknowledged Wednesday that former chairman Richard M. Scrushy, newly indicted on fraud charges, had a private investigator check out his background and often made derogatory comments about company directors.
“It was typical” for Scrushy to make such negative remarks, Robert May told a hearing by a House investigative subcommittee. May said he was told by fellow director Sage Givens early this year that Scrushy had the private investigator looking into him.
May and other HealthSouth directors, who approved lavish compensation for Scrushy while shareholders suffered huge losses as the company’s stock plummeted, insisted they were kept in the dark about accounting abuses by the outside auditors, Ernst & Young. Lawmakers questioned them about Scrushy’s treatment of directors and employees and other seemingly bizarre practices, such as costly reviews by the auditors of the health care giant’s toilet facilities.
Members of the House panel demanded to know why the directors and Ernst & Young auditors failed to detect the conspiracy, allegedly led by Scrushy, to overstate earnings by $2.7 billion since 1996.
The indictment of Scrushy on Tuesday supports the picture of his reign painted by former employees who described intimidation and abuse, said Rep. Jim Greenwood, R-Pa., chairman of the House Energy and Commerce Committee’s investigative panel.
“The overarching themes of Mr. Scrushy’s indictment are greed and more greed with a good dose of intimidation,” Greenwood said.
The indictment, naming Scrushy on 85 counts including fraud, conspiracy and money laundering, bears out the testimony of former employees before the panel last month, “including the intimidating atmosphere fostered by Mr. Scrushy that included hidden cameras and armed security guards,” Greenwood said.
Last month, the former employees also countered Scrushy’s assertion that he was unaware of financial manipulations at the company.
James Goodreau, the former HealthSouth security chief who also was Scrushy’s bodyguard, has testified that he had investigated May and briefly followed Joel Gordon, also a director and now acting board chairman, on orders from Scrushy.
At the same Oct. 16 hearing, Scrushy invoked his Fifth Amendment right against self-incrimination and refused to answer the lawmakers’ questions.
Givens, a member of the board’s audit committee for more than 13 years, testified Wednesday that the auditors at Ernst & Young never raised concerns to the panel during that time.
“We had numerous controls and systems in place that should have helped to detect this fraud,” Givens told the panel. “Unfortunately, when high-level management conspires to commit a criminal act, I do not know of any corporate governance policy that would prevent such criminal behavior.”
Scrushy was freed on $10 million bond on Tuesday after becoming the first CEO charged under a new federal law meant to crack down on corporate corruption. He is set to stand trial starting Jan. 5.
Scrushy pleaded innocent in a hearing after surrendering to federal authorities. In a message posted on his personal Web site, Scrushy said he was glad to have a chance to clear his name.
Prosecutors said that because Scrushy’s compensation was tied in part to HealthSouth’s performance, he pocketed $267 million in salary, bonuses and stock options and bought yachts, luxury cars, fine art and jewels.
Scrushy, 51, secured his bond with his three homes, 360 acres of plantation property and nearly 300,000 shares in HealthSouth stock.
Fourteen former HealthSouth employees, including all five of the conglomerate’s former chief financial officers, already have pleaded guilty to fraud charges since the Justice Department began investigating the coast-to-coast chain of surgery and rehabilitation clinics in March. Another person has agreed to plead guilty.
Scrushy has blamed the fraud on others within the company.
The charges include falsely attesting to the accuracy of corporate statements. Scrushy became the first CEO charged under the Sarbanes-Oxley Act, passed in reaction to the wave of scandals that engulfed Enron, WorldCom and other giant corporations.
That law requires chief executives and chief financial officers to certify their company’s financial statements as accurate and holds them criminally liable for falsehoods.
The indictment seeks more than $278 million in Scrushy’s allegedly ill-gotten gains, including a 92-foot yacht, a 40-foot racing boat, beach and lake homes, antique rugs and a 2003 Lamborghini.