In the first finger-pointing of what promises to be a long trial, one of the company's founders testified Wednesday that the accounting fraud at HealthSouth began at the direction of Richard M. Scrushy, its former chief executive.
Answering questions on the second day of the securities fraud trial of Mr. Scrushy, Aaron Beam, a former chief financial officer of HealthSouth, said Mr. Scrushy directed him to "fix" the numbers so the company would continue to meet Wall Street earnings expectations.
Mr. Beam, one of five former chief financial officers expected to testify as government witnesses at the trial, said he and another HealthSouth executive, William T. Owens, informed Mr. Scrushy in mid-1996 that there were no legitimate accounting methods they could use so the company would meet Wall Street expectations. In response, Mr. Beam testified, Mr. Scrushy told them: "It is not an option to miss our numbers. You guys need to fix our numbers."
Mr. Scrushy has denied any involvement in the sweeping accounting fraud that took place at HealthSouth, where the company inflated earnings by $2.7 billion. In opening arguments on Tuesday, his defense lawyers described Mr. Scrushy as being misled by his financial executives, who, they said, engineered the scheme.
Mr. Beam, who worked with Mr. Scrushy for four years at another hospital company before helping him found HealthSouth, said that Mr. Scrushy was not only aware of the fraud but sanctioned it and had warned him about the consequences if the fraud was ever uncovered.
"I was afraid, intimidated by Richard," he said. "He would do what he could do to protect himself and pin the crime on me."
Mr. Beam said he left in 1997 because he was troubled by the fraud, although the company continued to pay him for several years after he left.
In the first two days of testimony, prosecutors seem to be trying to lay out methodically a history of fraud, which they claim took place from 1996 until 2002. Mr. Beam said that Mr. Owens, who then reported to him, created false revenue to inflate the company's earnings, quarter after quarter, to continue the company's long record of meeting or beating Wall Street expectations.
During the cross-examination, Jim Parkman, the lawyer who is heading Mr. Scrushy's defense, tried to raise questions about Mr. Beam's recollection of what had happened nine years ago, focusing on whether Mr. Beam truly remembered that Mr. Scrushy had told him to "fix" the numbers. While Mr. Beam said he could not always specifically recall the events, he said he remembered the substance of what was said in the meetings with Mr. Scrushy and Mr. Owens.
Mr. Parkman also raised questions about Mr. Beam's credibility. Mr. Beam has entered a plea agreement with the government in which his cooperation may reduce any penalty for his participation in the fraud.
Defense lawyers also appear to be trying to portray government prosecutors as singling out Mr. Scrushy and trying to persuade former executives to implicate him in the fraud.
While defense lawyers suggested on Tuesday that Mr. Scrushy, with no accounting background, had little choice but to rely heavily on Mr. Owens and Mr. Beam to tell him about HealthSouth's finances, Mr. Beam described Mr. Scrushy on Wednesday as a hands-on executive who closely followed the company's financial performance.
While Mr. Beam conceded during cross-examination that Mr. Scrushy had only a week or two of formal accounting education, he described Mr. Scrushy as "a real smart guy," adding, "I was amazed at how much he learned in one or two weeks."
- 185 Corruption