A HealthSouth Corp. officer testified Thursday that last August executives devised a plan said to be supported by fired chief executive Richard Scrushy to conceal years of accounting fraud by selling off chunks of the company and taking the rest private again.
Kelly Coleman, an assistant vice president of finance at HealthSouth, said the plan was revealed by Weston Smith, the then-chief financial officer, in a secret meeting around Aug. 20. She said the meeting took place in the fifth-floor conference room close to Smith’s and Scrushy’s offices and included other accounting executives who have pleaded guilty in massive accounting fraud.
Coleman said Smith, the first to come forward and reveal the fraud to federal prosecutors last month, was emotional and distraught when he entered the meeting and said he was having trouble sleeping at night. She said he went on to say he didn’t want to sign the financial documents anymore and entries being made into the corporate books had to stop.
Smith then told of a strategy being set into motion and said, “Richard (Scrushy) was in support of the plan,” Coleman said. That plan entailed HealthSouth announcing a Medicare earnings hit, spinning its surgery centers off into a separate company, selling off its diagnostic centers and then taking what was left of HealthSouth private.
On Aug. 27, HealthSouth announced a $175 million earnings hit because it had been miscalculating Medicare billing rates. As part of the same announcement, the company said it would spin-off its outpatient surgery centers, and that Scrushy would become the chairman of HealthSouth and the new company. That same announcement made Bill Owens the HealthSouth CEO.
The Securities and Exchange Commission has charged in a civil lawsuit against Scrushy and HealthSouth that the $175 million was grossly overstated in an effort to make up for falsified earnings. The SEC alleges the actual impact of the Medicare calculation change was around $30 million. HealthSouth executives have testified their internal calculations put the impact at around $55 million.
Emery Harris, Kay Morgan, Cathy Edwards, Angela Ayers and Virginia Valentine were the other accounting executives that Coleman said attended the meeting last August. All but Coleman have since pleaded guilty in the accounting fraud scheme and are assisting in the federal investigation and a possible criminal case against Scrushy.
Coleman said she had no hint of the fraud until Smith’s comments at the meeting. She said even though she made some of the accounting computer entries that have now been called into question, she did not know they were illegal and nearly always got satisfactory explanations for the entries from her supervisors.
Coleman was called as a rebuttal witness by the SEC during the 10th day of testimony after Scrushy’s defense team spent all but the first two days presenting its case. She was one of seven witnesses to take the stand Thursday as the agency attempted to discredit defense testimony.
Scrushy is seeking the release of at least $40 million of his assets which U.S. District Judge Inge Johnson froze after the SEC accused him of orchestrating a scheme to inflate profits by at least $1.4 billion since 1999. Another HealthSouth executive who pleaded guilty in the scheme has identified another $1.1 billion in overstated earnings.
Scrushy’s lawyers have attempted to portray him as a mere figurehead unaware of accounting fraud. They have fingered Owens as the accounting scheme’s architect. Scrushy has not been charged with a crime, but a federal grand jury is investigating.
Joel Gordon, Scrushy’s interim successor as chairman of the HealthSouth Board of Directors, also testified Thursday. He said the eight members of the 10-member board, less Scrushy and Owens, voted unanimously to put Scrushy on administrative leave and then later fire him.
“Myself and all the other directors were shocked at what had taken place,” Gordon said.
Gordon testified Thursday that HealthSouth is trying to sell its Southside Medical Center to UAB or St. Vincent’s. “The reason for that is we need cash,” he said.
Gordon also challenged the defense’s contention that Scrushy beat back a coup attempt by Owens and was subsequently demoted from CEO to CFO in January.
Gordon said Scrushy was returned to the CEO job and Scrushy wanted to make Owens CFO because the split of the company had been called off.
In his testimony, Gordon expressed no knowledge of a coup attempt.
Another of Scrushy’s attorneys’ contentions is those who committed the fraud hid away $300 million in cash accounts that officials now say is missing. Gordon said Thursday he doesn’t believe such an account ever existed.
On Wednesday, Tom Sjoblom suggested in his questioning Scrushy made an attempt to identify an extra $350 million on the balance sheet a week before the SEC filed its suit and the FBI raided HealthSouth’s headquarters. His attorneys said Thursday Scrushy did not know at that time that the money was either phony or missing.
Brandi White, a HealthSouth employee in charge of the daily accounting of the company’s cash accounts, said Thursday she did not know if it would be possible to hide $300 million in the accounts.
Perhaps the most dramatic testimony of the day came from a former HealthSouth auditor.
Neal Webster, a former certified public accountant who joined HealthSouth in 1989, testified that he was fired by Scrushy after questioning accounting procedures and asking to see corporate accounting books.
He said he became concerned in the summer of 1989 after talking with a HealthSouth employee at the company’s Miami-facility and learning that old accounts receivable were not written off at Birmingham’s directive.
Webster said he discussed the issue on the phone from Miami with Smith, who indicated he was aware of the accounting deficiency. Webster said he got back to Birmingham and later met with Scrushy and two other executives, and Scrushy told him the company was under pressure to make certain numbers.
Webster said Scrushy became angry and told him: “Who in the hell told you you could look at corporate books?”
“I said `You did when you hired me,'” Webster said.
Webster testified that he was fired and given a severance package.
Sjoblom worked to discredit his testimony. Webster testified under cross examination that he was fired from BellSouth, accused of stealing light fixtures from a Birmingham home the company moved him from when transferring him to Atlanta.
Webster also had a felony conviction for using a fake Alabama address for a title on a motorcycle.
Sjoblom also asked Webster whether the real reason Webster was fired was because he sexually harassed a Florida employee. Webster, chuckling, denied that occurred.
Closing arguments are expected today.