updated 7/12/2006 3:42:49 PM ET 2006-07-12T19:42:49

A federal appeals court said the seven-day prison term given an architect of the $2.7 billion fraud at HealthSouth Corp. was “shockingly short” and ordered another sentencing before a new judge.

Ruling in a 32-page decision, the 11th U.S. Circuit Court of Appeals overturned the sentence of former HealthSouth finance chief Mike Martin and sent the case back to district court for a second time.

U.S. District Judge U.W. Clemon first sentenced Martin to probation and house arrest, but prosecutors won an appeal. Clemon then sentenced Martin to a week in prison, prompting another appeal and the 11th Circuit’s ruling Tuesday overturning the sentence and removing Clemon from the case.

The 11th Circuit said the case should be reassigned because it was likely Clemon “would have difficulty putting his previous views and findings aside.” Prosecutors have also appealed other sentences handed down by Clemon in HealthSouth-related cases and viewed by the government as too light.

Martin pleaded guilty, and his cooperation with agents helped uncover parts of the huge accounting conspiracy at HealthSouth, the Birmingham-based rehabilitation and medical services chain.

Martin testified last year against former CEO Richard Scrushy, who was acquitted on all charges. Martin took the stand again this year in Montgomery in the trial of Scrushy and former Gov. Don Siegelman, who were both convicted in a state bribery scheme.

While prosecutors twice sought prison time for Martin, Clemon ruled that he deserved lighter punishment because of his extensive assistance to prosecutors and attorneys pursuing civil cases over the HealthSouth debacle. Martin also said he tried to end the fraud during his 2½ years as CFO beginning in 1997.

The appeals court disagreed with Clemon that Martin — who already has paid a $50,000 fine and forfeited $2.4 million — had been punished enough.

“Martin’s cooperation, while commendable and extremely valuable, is not a get-out-of-jail-free card,” the court said.

The court did not suggest a more appropriate sentence, but it said a term of one week was “not nearly within” the range of reasonable punishments. Prosecutors previously sought a prison sentence of 3½ years for Martin.

Martin was among 15 former HealthSouth executives who pleaded guilty in the fraud and cooperated with authorities. Sentences for the group ranged from probation to five years in prison for former finance chief Bill Owens.

The lone executive tried and convicted by jurors, Hannibal “Sonny” Crumpler, was sentenced to eight years imprisonment.

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