BIRMINGHAM, Ala. – Analysts saw unsettling financial numbers from HealthSouth Corp. (search) but had no idea of the massive accounting fraud at the medical services chain until it unraveled, testimony showed Thursday at the trial of ousted chief executive Richard Scrushy (search).
Merrill Lynch analyst A.J. Rice said financial reports made public by HealthSouth showed capital expenditures that were "significantly higher" than those of similar companies. From 1999 through 2001, he said, HealthSouth's capital spending was twice the industry average.
"That was something we came to question over time, and so did other investors," said Rice.
Previous testimony showed finance executives at HealthSouth were placing millions of dollars fraudulently into the capital expenditures account, contributing to a $2.7 billion overstatement of earnings for seven years beginning in 1996.
Rice testified he had no idea HealthSouth's financial reports were riddled with bogus numbers.
Under cross-examination by Scrushy's son-in-law Martin Adams, a member of the defense team, Rice said he had no direct knowledge that Scrushy had anything to do with the fraud, which sent stock prices plummeting once it was revealed in 2003.
U.S. District Judge Karon O. Bowdre called off court for the rest of the day after Rice finished testifying, saying a juror was ill. Bowdre said it was unclear whether the trial would resume Friday.
Scrushy is accused of leading a conspiracy to inflate HealthSouth earnings to make it seem the rehabilitation company was meeting Wall Street estimates. Prosecutors claim Scrushy made millions off the fraud.
The defense argues that former Scrushy subordinates ran the fraud on their own and hid it from him as they got promotions and raises.
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 accused of violating the Sarbanes-Oxley Act (search), passed in 2002.
Scrushy could be sentenced to what amounts to a life term and ordered to pay fines up to $278 million in assets if convicted.