HealthSouth exec suspected fraud years ago

/ Source: The Associated Press

A HealthSouth Corp. executive suspected financial wrongdoing as early as 1998 but her superiors ignored her concerns, according to testimony Tuesday in the fraud trial of fired CEO Richard Scrushy.

Prosecutors contend the experiences of financial executive Diana Henze and Kelly Cullison, a former worker in the corporate compliance office, help explain how the fraud got by internal controls — though neither woman directly linked Scrushy to the conspiracy.

Scrushy is accused in a conspiracy to overstate earnings by some $2.7 billion from 1996 through 2002, making it appear HealthSouth was meeting Wall Street estimates as he made millions from bonuses, salary and stock options.

The defense argues Scrushy’s subordinates committed the fraud on their own and hid it from him for years as they climbed the corporate ladder.

Just back from maternity leave in spring 1999, Henze said she noticed a $60 million jump in net income and a boost of 14 cents in earnings per share as quarterly reports were being put in final form. She’d noticed odd numbers in 1998, too.

Henze, an assistant vice president of finance at the time, testified she told her supervisor, then-assistant controller Ken Livesay, that the big jumps “looked very suspicious” and that she suspected “something was going on.”

A few days later, Henze said, then-controller Bill Owens called her into his office and explained that “things” had to be done or earnings would fall and “people would start losing their jobs.” She said she also talked to then-finance chief Mike Martin about her worries.

Livesay, Owens and Martin are among 15 former HealthSouth executives who pleaded guilty and are cooperating with prosecutors.

Henze said she also reported her suspicions about questionable entries to Cullison in HealthSouth’s compliance office, and Cullison testified she found some “large dollar amounts” in the company’s accounts that looked odd.

But Cullison said internal auditors lacked access to corporate records where the fraud was committed, so a full investigation wasn’t possible. She took the matter to corporate compliance officer Tony Tanner, who later told her the matter was closed despite no apparent review.

Tanner, who helped Scrushy found HealthSouth and served on the board, retired within weeks.

Previous evidence showed the fraud continued until it began unraveling in mid-2002, a few months before the FBI raided HealthSouth headquarters in March 2003.

Henze said she was transferred to the information technology division for about a year after reporting her suspicions, but she has since returned to the accounting office, where she is currently vice president of finance.

Earlier, while the fraud was going on, Henze said, she missed a promotion because of her unwillingness to go along with the scheme. She quoted Owens as explaining the problem to her: “‘You won’t do what we’ve asked you to do.”’

Cullison quit HealthSouth in 2001; neither she nor Henze was implicated in any wrongdoing.

Scrushy 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 2002 Sarbanes-Oxley Act.

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