Witness: Scrushy Knew About Phony Statements

Highlighting potentially damaging evidence against Richard Scrushy (search), a former aide said Wednesday the fired HealthSouth CEO wasn't shocked when he heard a reference to "phony financial statements" in a secretly recorded conversation.

The testimony by former HealthSouth (search) chief financial officer Bill Owens, a key prosecution witness, came on his 11th and likely final day on the stand.

In some of his final questions to Owens, prosecutor Richard Wiedis asked about a recording from March 2003 that jurors heard previously. In the recording, Owens told Scrushy his wife was worried about Owens going to prison for signing "phony financial statements."

"After you used the words `phony financial statements,' did the defendant act surprised?" Wiedis asked.

"No, he didn't," said Owens.

Prosecutors claim the "phony" statements and others captured on recordings made by Owens for the FBI show Scrushy was at the heart of a scheme to overstate HealthSouth earnings by some $2.7 billion to make it appear the rehabilitation chain was meeting Wall Street forecasts.

The defense maintains Owens was the head of a group that committed the fraud for years and hid the scheme from Scrushy with a web of lies.

During cross-examination before U.S. District Judge Karon Bowdre, Scrushy lawyer Jim Parkman did not ask Owens about the recorded exchange in which "phony financial statements' was mentioned. Rather, he showed that Owens tried to deduct $110,527 on a tax return for legal fees related to lawsuits filed over the HealthSouth scandal.

"You're wanting to deduct $110,000 in legal fees for a fraud you committed," Parkman asked indignantly.

Owens said his lawyer and accountant told him the deduction was proper since it was related only to civil lawsuits and not criminal charges.

Owens is one of 15 former HealthSouth executives who pleaded guilty and could testify against Scrushy. Owens is awaiting sentencing; his attorney has said he expects him to serve time in prison.

Free on $10 million bond, Scrushy is charged with 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 (search), passed in 2002 after a series of corporate scandals.

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