Witness: Scrushy encouraged fraud

/ Source: The Associated Press

Former HealthSouth CEO Richard M. Scrushy feared a shareholder lawsuit and encouraged employees to continue a huge accounting fraud so he’d be able to sell $100 million of company shares, a former HealthSouth financial officer told a federal jury.

Ex-CFO Bill Owens said Scrushy told him in late 1997 that he planned to sell the large stake and wanted to know if the manipulation that had begun a year earlier could continue without being detected.

“He wanted to make sure I felt like I could get through the audit,” Owens testified Wednesday. “As always, I told him we were going to do our best.”

Owens described Scrushy as a master salesman who led with such sufficient fear and intimidation that employees acquiesced in the scheme, which prosecutors have described as a $2.7 billion earnings overstatement.

“I think Richard may be the best salesman I’ve ever met,” said Owens. “He was able to convince me to do things I knew were wrong.”

The testimony came on Owens’ second day on the stand in Scrushy’s federal trial on corporate fraud charges. Owens is one of 15 former executives who pleaded guilty to his role. He agreed to testify for prosecutors under a plea deal.

Jurors have yet to hear recordings that Owens secretly made for the FBI of his talks with Scrushy in March 2003 shortly before the raid that ultimately resulted in Scrushy’s indictment.

Workers used correction fluid on old invoices, whiting out legitimate numbers and putting in bogus figures, Owens said, and they falsely recorded $400 million in fraudulent “goodwill” assets when HealthSouth bought rival Horizon CMS for more than $1.5 billion in 1997.

Prosecutors allege Scrushy, 52, got rich from stock sales, bonuses and salary by directing a fraud that led to the overstatement of HealthSouth earnings from 1996 through 2002.

The defense contends Owens and other subordinates in HealthSouth’s corporate accounting offices lied to Scrushy for years, leaving him unaware of the conspiracy.

In court Wednesday, Owens said Scrushy directed him and another former finance chief, Mike Martin, to keep the fraud going for another year to avoid a lawsuit from shareholders if the stock’s price dropped.

Evidence has shown the fraud continued through 2002. Owens said Scrushy was behind it from the start and received regular reports showing the company’s true financial state was inadequate to meet Wall Street’s income estimates.

A handful of workers who saw those weekly reports were ordered to destroy the documents because they had “incriminating information,” he said. Still, some survived: The prosecution showed jurors what Owens identified as page after page of the documents.

In 1997, when prosecutors say the fraud reached $396 million total, Scrushy gave himself a $10 million bonus and received several $200,000-a-month bonuses for meeting budget, Owens said. Scrushy also got $15.8 million in stock options that year, he said, or about 19 percent of all the options the company awarded.

With conspirators worried when the fraud exceeded $600 million in 1998, its largest year, Owens said they devised a plan to get analysts to lower earnings estimates by saying managed care and a federal balanced budget bill could affect revenues.

Scrushy presided over weekly meetings of corporate officers in which he would “call people out” if he didn’t like something, he said. Scrushy alone decided who became an officer and set salaries, Owens testified.

Scrushy, HealthSouth’s primary founder in 1984, is charged with conspiracy, fraud, money laundering, obstruction of justice and perjury. He also is accused of false corporate reporting in the first test against a CEO of the Sarbanes-Oxley Act, passed in 2002.

If convicted, he could receive what amounts to a life sentence. Prosecutors also are seeking $278 million in assets.