Witness: Ex-HealthSouth CEO Urged Fraud

BIRMINGHAM, Ala. – A former HealthSouth Corp. (search) chief financial officer said on Tuesday that then Chief Executive Richard Scrushy (search) insisted the company's earnings meet Wall Street expectations in order to prop up the stock price, even if it meant committing fraud.

Former CFO Michael Martin told the U.S. District Court in Birmingham that Scrushy was worried that if the stock price fell after he and Martin sold a significant amount of shares, they would be inundated with shareholder lawsuits.

Martin said he had informed Scrushy that HealthSouth was going to miss Wall Street expectations for the first quarter of 1998 by 13 cents per share.

"Richard Scrushy told me 'you guys know what to do,"' Martin testified at Scrushy's criminal trial.

"I told (Scrushy) we would either have to make a major acquisition, continue the fraud or lower expectations," Martin said.

"Mr Scrushy was extremely resistant to lowering Wall Street expectations," Martin said, adding that he was told to keep stock prices up for a year to avoid suspicion. On Monday, he testified he had sold $3 million worth of HealthSouth stock in 1997 and Scrushy had sold more than $100 million in stock.

"You guys figure it out," Martin said he was told. He said he and Scrushy instructed William Owens, who was then treasurer and later became CFO, to fix the numbers.

Martin and Owens are among 15 former HealthSouth executives who pleaded guilty to fraud and agreed to cooperate in the case against Scrushy.

The government contends Scrushy directed a $2.7 billion accounting fraud from 1996 to 2002 for his own financial gain. Scrushy insists the fraud was carried out by underlings without his knowledge.

And while several former executives have now testified that Scrushy was fully aware of the bogus accounting, none has testified he ever used directly incriminating words such as "fraud."

Martin said while on vacation in July of 1998, he got a call from Kenneth Livesay, the assistant controller, telling him that the company had actually lost money in June.

"A loss was totally unacceptable," Martin told the court.

"I had been fearful for six months and realized I was in way over my head," Martin told jurors.

"I sat there with my head in my hands and thought 'dear God, how can I get out of this?' I knew I was committing a crime," Martin said.

"I didn't know if I could get Mr Scrushy to lower the expectations, in what legitimate way I could get out of this.

"Every time I wanted to lower expectations, I got slapped back because of stock sales," Martin said.

When the prosecutor asked who slapped him back, Martin responded: "Richard Scrushy."