Confronted with sagging revenues, then-CEO Richard Scrushy repeatedly refused to report lower HealthSouth Corp. earnings and instead continued a fraud for fear of shareholder lawsuits, a former finance executive testified Tuesday.
Mike Martin, the third former chief financial officer to tie Scrushy to a massive conspiracy, said Scrushy insisted on artificially inflated earnings in 1998 because he and Martin had sold millions in stock and he didn’t want to get sued if stock prices fell.
“Every time I would push to lower expectations, I’d get slapped back and he’d say, ‘We can’t, we sold stock last year,”’ said Martin, who pleaded guilty in the scam.
Scrushy finally agreed to lower the company’s earnings expectations and came up with a story to hide the change, Martin said, but only after the window for shareholder suits had closed.
Prosecutors claim Scrushy was behind a conspiracy to overstate HealthSouth earnings by some $2.7 billion from 1996 through 2002, getting rich off salary, bonuses and stock sales as stock prices remained artificially high.
The defense argues that Martin and other former executives who pleaded guilty pulled off the fraud on their own in a bid to earn promotions and make more money.
Scrushy, HealthSouth’s primary founder, knew all about the fraud and told underlings, “You know what to do” when the rehabilitation chain failed to meet Wall Street expectations by 16 cents a share in early 1998, Martin testified.
Martin described his personal anguish when assistant controller Ken Livesay called him a few months later to report that HealthSouth was actually losing money, something that hadn’t happened before.
In 'way over my head'
“I realized I was in way over my head at that point,” said Martin. “I remember sitting there with my head in my hands after I got off the phone with Ken thinking, ‘Dear God, how am I going to get out of this?”’
Seated just a few feet from Scrushy, Martin glanced around the courtroom and occasionally stared at the ceiling as he testified.
Jurors at first appeared to pay close attention to Martin, who has a reputation for a bad temper and seemed to chafe at times under friendly questioning from prosecutor Richard Smith. Previous testimony showed Martin punched a co-worker who quit HealthSouth rather than get involved in the fraud.
But testimony slowed to a crawl as Smith had Martin go through financial statements and budget documents for 1999, explaining how HealthSouth’s “real” numbers showed the company earning 56 cents a share after Scrushy had promised analysts as much as $1.29 per share.
Martin described Scrushy as being heavily involved in corporate finances, undercutting defense claims that Scrushy was unaware of the fraud.
Scrushy was familiar enough with the company’s operations to discuss the performance of individual HealthSouth facilities at executive meetings, according Martin. He also approved all the company’s earnings statements before they were made public, said Martin.
“He would make changes. He would edit it,” said Martin.
With HealthSouth about $71 million short of projected revenues at one point, Martin testified he told Scrushy the company either had to make a large acquisition or lower its earnings guidance to Wall Street.
“(Scrushy) was extremely resistant to lowering Wall Street estimates. He said, ‘We can’t lower estimates,”’ Martin said.
Scrushy is on trial on charges of 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.
If convicted, Scrushy could be sentenced to what amounts to a life term and have to give up as much as $278 million in assets including homes, cars, art, jewelry and accounts.