A prosecution witness put the HealthSouth Corp. fraud into military terms Monday, describing fired CEO Richard Scrushy as the powerful commander in chief of a rehabilitation chain relying on "covert operations" to meet Wall Street forecasts.
"It was just inconceivable that something this massive was going on without his knowledge," said Ken Livesay, a former assistant controller who pleaded guilty in the scheme.
The depiction was at odds with defense attempts to portray another Scrushy aide, former chief financial officer Bill Owens, as the mastermind of what prosecutors contend was a $2.7 billion earnings overstatement.
Under prosecution questioning, Livesay described Scrushy as an intimidating leader no one would cross. Scrushy worked hard, was "incredibly talented and gifted" and could "achieve anything he set his mind to," Livesay said.
"Mr. Scrushy was the commander in chief. He had some generals who reported to him, and he had some captains, and he had a lot of lieutenants. I was a lieutenant," said Livesay.
Livesay said his role in the fraud — finding accounts in which to hide millions in bogus numbers each quarter — amounted to "covert operations."
"When something came to me, I had no reason not to believe it wasn't coming from the commander," said Livesay, speaking slowly in an apparent attempt to keep his emotions in check.
Prosecutors claim Scrushy was behind a scheme to overstate HealthSouth earnings for seven years beginning in 1996. Scrushy made millions from stock options and bonuses during the conspiracy, they contend.
The defense claims Livesay, Owens and other subordinates used lies to hide the fraud from Scrushy, allowing them to earn more money as they climbed the corporate ladder.
Livesay, who earned a $45,000 salary in his first year at HealthSouth in 1989, said he was making $300,000 annually in salary and bonuses by the time he left in 2003.
In cross-examination, defense attorney Art Leach brought out that it was Owens who first came up with the idea of inflating HealthSouth's fixed-asset accounts as an audit loomed.
"We had run out of ideas," said Livesay, among 15 former executives who have pleaded guilty. "We had a problem on the balance sheet of more than $400 million if we were going to make it through that audit."
To make it possible to hide fraud in fixed-asset accounts, Livesay said, Owens brought more people into the conspiracy.
Owens, who secretly recorded talks with Scrushy and testified earlier in the trial, has also pleaded guilty and is cooperating with prosecutors.
Referring to a corporate acquisition that workers used to hide some of the fraud, Leach suggested to Livesay that someone like Scrushy — who is not an accountant — would have had a hard time understanding what was going on.
"This is pretty esoteric accounting stuff, isn't it?" he asked.
"Yes," Livesay said in his fourth day on the stand.
Livesay said he briefly served as a director of a charitable organization that got $50,000 from Scrushy and some $400,000 from city and state governments, but he was "fired" after questioning whether the group's money was being wrongly used for personal and political expenditures.
Free on $10 million bond, Scrushy is accused of conspiracy, fraud, money laundering, obstruction of justice, perjury and false corporate reporting in the first case of a CEO being charged with violating the 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.