HealthSouth’s Alleged Coverup Detailed

The massive fraud at HealthSouth Corp. began unraveling days after President Bush signed a new law with stiff penalties for false corporate reporting, according to testimony Friday by a former finance chief at the trial of fired Chief Executive Richard Scrushy.

Bill Owens, who served in several top positions at the rehabilitation giant, said then-Chief Financial Officer Weston Smith told him he was quitting Aug. 5, 2002, rather than signing bogus financial statements just days after the Sarbanes-Oxley law went into effect amid a wave of corporate scandals.

“He said he just couldn’t sign the certifications and was quitting,” Owens testified in U.S. District Court in Birmingham, Ala.

Owens said he and Scrushy -- the first chief executive tried under the law -- tried to come up with a way to keep Smith “on the reservation” and get him to sign the financial reports, which Smith knew were fraudulent.

In a hastily arranged meeting, Owens said he and Scrushy decided to end the fraud and blame the subsequent earnings decline on new Medicare rules. Owens said they also decided to split HealthSouth in two as a diversion and to put Smith in the surgical division, where accounts were “clean.”

Owens said he laid out the plan during a meeting in Smith’s car as Smith drove him around on Interstate 459 for a couple of hours.

“I told [Smith] this gave us a fighting chance, that we could get things fixed and nobody would have to get hurt,” Owens said.

The next day, after meeting with Scrushy, Smith agreed to sign the certification and become chief financial officer of the new surgical division, Owens said.

Seven months later, in March 2003, Smith became the first of 15 HealthSouth executives to plead guilty in what prosecutors describe as a scheme to overstate earnings by more than $2.6 billion. Among other things, Smith pleaded guilty to signing false statements Aug. 14, 2002, with Sarbanes-Oxley in effect.

Smith is expected to testify against Scrushy.

Many pieces of the alleged plan to end the fraud went forward in August 2002: The company blamed a $175-million earnings reduction on Medicare rules, and it announced it was spinning off its surgical centers into a new company.

In the “firestorm” of investor suits, investigations and news reports that followed the earnings announcement, Owens said Scrushy offered to “take care of my family” if Owens would “take the fall” for the fraud.

Prosecutors contend that Scrushy directed the fraud from 1996 until 2002 to drive up HealthSouth stock prices for personal profit.

The defense says Owens, Smith and other subordinates lied to Scrushy for years, keeping him in the dark about the fraud.

In a fourth day on the witness stand, Owens said Scrushy knowingly spouted bogus numbers about the rehabilitation giant in a national TV appearance in 2002 just days before he sold $74 million in stock options.