updated 3/3/2005 1:11:01 PM ET 2005-03-03T18:11:01

A former HealthSouth finance chief testified Thursday that then-CEO Richard Scrushy referred to him as the potential "fall guy" for a massive fraud as an earnings overstatement scheme swelled out of control.

Mike Martin, one of 15 former executives who have pleaded guilty in the case, said he told Scrushy he would resign in 1998 as internal projections showed HealthSouth Corp. earnings for the next year at a maximum of 78 cents a share, well short of the $1 ordered by Scrushy in a bid to keep stock prices around $15 a share.

"He said, 'Martin, you can't quit. You'll be the fall guy,'" Martin testified in his third day on the stand.

Martin, who was chief financial officer at the time, said he was "petrified" by Scrushy's remark.

"I felt like I was stuck. I felt like I couldn't get out of it," he said.

Martin previously testified that Scrushy resisted lowering earnings estimates because he feared shareholder lawsuits after selling more than $100 million in stock. Evidence has shown the medical rehabilitation company inflated earnings through mid-2002.

With Martin in the witness box, jurors listened to a recording of a 1999 meeting with managers in which Scrushy expressed pride in HealthSouth's supposed record of meeting Wall Street forecasts — a performance that was later revealed to be false.

"We've been right on track for 50 quarters," said Scrushy. He referred to HealthSouth as "the greatest health care company on the face of the Earth" and encouraged workers to buy stock.

The government claims Scrushy was behind a conspiracy to overstate HealthSouth earnings for seven years beginning in 1996, when it began missing Wall Street estimates. Scrushy made millions off the scheme through salary, stock sales and bonuses, prosecutors claim.

The defense contends Martin and other former Scrushy aides who were in a group called "the family" came up with the conspiracy on their own and hid it from the chief executive so they could get promotions and raises.

With members of the conspiracy fighting stress and frazzled nerves as they tried to conceal some $600 million in fraud for the 1998 year-end audit, Martin said he was called to give the family a "pep talk."

Martin described his speech as a failure: The meeting ended with assistant controller Ken Livesay yelling and saying, "We're digging a hole deeper and deeper."

Livesay, one of the former HealthSouth executives who pleaded guilty, testified previously against Scrushy.

Scrushy is accused of conspiracy, fraud, money laundering, obstruction of justice and perjury. He also is charged with false corporate reporting in the first test of the 2002 Sarbanes-Oxley Act against a chief executive.

If convicted, Scrushy could get what amounts to a life sentence and be ordered to forfeit as much as $278 million in cars, boats, homes and other assets.

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