HealthSouth Witness: Fraud Suspected in '98

A HealthSouth Corp. executive testifying Tuesday in the trial of fired CEO Richard Scrushy (search) said she suspected fraud after seeing oddly inflated earnings years before an accounting scandal erupted publicly at the rehabilitation giant.

Just back from maternity leave in spring 1999, Diana Henze said she noticed a $60 million jump in net income and a boost of 14 cents in earnings per share as quarterly reports were being put in final form. She'd noticed odd numbers in 1998, too.

Henze, an assistant vice president of finance, testified she told her supervisor, then-assistant controller Ken Livesay, that the big jumps "looked very suspicious" and that she suspected "something was going on."

A few days later, Henze said, then-controller Bill Owens called her into his office and explained that "things" had to be done or earnings would fall and "people would start losing their jobs."

Henze reported her suspicions to the HealthSouth (search) compliance staff a few days later, but previous evidence showed the fraud continued until it began unraveling in mid-2002. The FBI (search) raided headquarters in March 2003.

Henze's testimony did not directly tie Scrushy to the fraud. In meetings, she said, Scrushy talked about HealthSouth's stock being undervalued and claimed the company had the strongest balance sheet in the industry.

Henze said she was transferred to the information technology division for about a year after reporting her suspicions of fraud, but she has since returned to the accounting office, where she is currently vice president of finance.

Henze was not implicated in the wrongdoing; Livesay and Owens are among 15 people who have pleaded guilty in the fraud and are cooperating with investigators.

Prosecutors allege Scrushy was behind a scheme to overstate HealthSouth earnings by some $2.7 billion from 1996 through '02. Scrushy made millions off the conspiracy by keeping stock prices high, they charge.

The defense contends Owens was the leader of a group of executives who committed the fraud without Scrushy's knowledge.