updated 2/16/2005 8:01:31 PM ET 2005-02-17T01:01:31

A red-faced Richard Scrushy exploded in anger after being confronted about fabricated earnings at HealthSouth in 1999, according to testimony Wednesday by a former employee who said he quit over the fraud and also claimed a former company officer punched him.

Leif Murphy, once a group vice president at HealthSouth, told about the encounters after former finance chief Bill Owens finished 11 days of testimony that cast Scrushy as leader of the long-running scheme at the rehabilitation giant.

Prosecutors say Scrushy directed a conspiracy to overstate HealthSouth Corp.’s earnings by some $2.7 billion for seven years beginning in 1996.

The defense has portrayed Owens as the head of a group that committed the fraud and hid it from Scrushy.

In some of the trial’s most dramatic testimony yet, Murphy described what happened once he realized the company’s earnings were severely overstated in 1999, three years after he began working there.

After seeing numbers showing HealthSouth would miss its earnings estimate by 20 cents a share in the second quarter, Murphy said he met with Scrushy and then-chief financial officer Mike Martin in Scrushy’s large office.

Advocating a reduction in earnings estimates, Murphy said he told Scrushy the company would need “fabricated earnings” 72 percent higher than its actual results to meet Wall Street forecasts.

“Mr. Scrushy was listening silently but intently,” said Murphy, who now works for a company in Nashville, Tenn.

Scrushy said he wanted to think about the presentation, and Murphy said he and Martin went to Martin’s office. Moments later, Murphy said, a red-faced Scrushy burst through the door, gesturing angrily and talking loudly.

“He said, ‘Where do (you) get off trying to tell (me) how to run the company I’ve run for 14 years?”’ Murphy said. Scrushy turned and slammed the door and, within two weeks, reported bogus numbers on a conference call with analysts, Murphy testified.

Physical fight
Murphy, who said he does not face the threat of prosecution, testified he told Scrushy he was quitting less than two weeks later — despite a $1 million offer from Martin to stay. At his going-away party, Murphy said, Martin “sucker punched” him twice, prompting a fight.

Earlier, Martin had written a vulgarity on his going-away card, Murphy said. Martin later apologized for the assault, and the men settled their differences, Murphy said.

In his last day on the stand, Owens testified that Scrushy wasn’t shocked when he heard a reference to “phony financial statements” in a secretly recorded conversation.

Prosecutor Richard Wiedis asked about a recording from March 2003 that jurors heard previously. In the recording, Owens told Scrushy his wife was worried about Owens going to prison for signing “phony financial statements.”

“After you used the words ‘phony financial statements,’ did the defendant act surprised?” Wiedis asked.

“No, he didn’t,” said Owens.

Owens also was asked by the prosecutor if Scrushy told him to go to regulators or the corporate compliance office after hearing about the “phony” reports. But U.S. District Judge Karon Bowdre, upholding defense objections, wouldn’t let Owens answer.

Scrushy unfazed by 'phony' statements
In final cross-examination, Scrushy lawyer Jim Parkman did not ask Owens about the recorded exchange in which “phony financial statements” were mentioned. Rather, he showed that Owens tried to deduct $110,527 on a tax return for legal fees related to lawsuits filed over the HealthSouth scandal.

“You’re wanting to deduct $110,000 in legal fees for a fraud you committed?” Parkman asked indignantly.

Owens said his lawyer and accountant told him the deduction was proper since it was related only to civil lawsuits and not criminal charges.

Owens and Martin are among 15 former HealthSouth executives who pleaded guilty in the accounting fraud and could testify against Scrushy. Owens is awaiting sentencing; his attorney has said he expects him to serve time in prison.

Free on $10 million bond, Scrushy is charged with conspiracy, fraud, money laundering, obstruction of justice and perjury. He also is accused of false corporate reporting in the first case of a CEO being charged with violating the Sarbanes-Oxley Act, passed in 2002 after a series of corporate scandals.

If convicted, Scrushy could get what amounts to a life sentence and have to forfeit as much as $278 million in assets.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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