Former HealthSouth CFO: Investment Banker Knew of Fraud

BIRMINGHAM, Ala. – Former HealthSouth Corp. (search) Chief Financial Officer Michael Martin testified in court that the company's investment banker knew accounting fraud was occurring there.

Martin also testified that he brought UBS banker William McGahan to former Chief Executive Richard Scrushy's (search) home to convince him not to buy Manor Care Inc. (search) , a nursing home and assisted living facility operator, in 1999 because of concerns that accounting fraud would be revealed.

"I told McGahan that he had to help me talk Mr. Scrushy out of this transaction because we were missing our numbers by $3at the health care company. Scrushy pleaded not guilty to the charges and said the scheme was developed without his knowledge.

Despite having HealthSouth board approval, the deal did not happen. Martin said the fraud could have been exposed either during due diligence or after the merger was completed.

Martin recalled that Scrushy asked him if McGahan knew about the accounting fraud.

"I told him, but he won't tell anybody, because he has as much to lose as we do," Martin said.

Martin said he told McGahan that HealthSouth was $10 million a week short of sales targets.

Several civil lawsuits contend auditors Ernst & Young and investment bankers at UBS, where McGahan worked, were aware of fraud at the Birmingham, Ala.-headquartered operator of physical therapy, outpatient surgery and diagnostic imaging centers.

McGahan's attorney, Helen Gredd, declined to comment, citing a judge's order restricting comments on testimony.

UBS (search) declined to comment immediately on the testimony and Ernst & Young (search) has said the firm's inclusion in civil cases was not justified. A spokesman for Manor Care was not immediately available.

Martin is one of 15 former HealthSouth executives who have pleaded guilty to accounting fraud. Martin is the third former chief financial officer of the five that pleaded guilty to say he directly discussed the fraud with Scrushy.

Martin also testified he felt "stuck" at the company as a result of fraudulent accounting.

Scrushy told Martin he could not leave the company.

"Martin, you can't quit. You'll be the fall guy," Martin recounted Scrushy saying around the time the health care provider's books were being audited for the 1998 year.

"I was scared. I was intimidated. I felt stuck," Martin added.