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Jury Hears Tapes in Scrushy's Fraud Trial

HealthSouth Founder Spoke of SEC Interview

By Carrie Johnson
Washington Post Staff Writer
Thursday, February 10, 2005; Page E01

BIRMINGHAM, Feb. 9 -- Federal prosecutors on Wednesday introduced the centerpiece of their fraud case against former HealthSouth Corp. founder Richard M. Scrushy, playing for the jury 13 minutes of secretly recorded audiotapes in which Scrushy tells subordinates, "This conversation did not happen," and boasts that he got the better of government investigators.

Securities and Exchange Commission lawyers who interviewed him days earlier were "on a witch hunt," Scrushy said on tape. "They ain't got nothing. They didn't ask me nothing about the numbers."

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Scrushy stands accused of 58 criminal charges in connection with a $2.7 billion accounting fraud at the Birmingham rehabilitation hospital chain. Among the counts he faces are conspiracy, money laundering and signing false financial statements under the Sarbanes-Oxley Act. Scrushy claims he was misled by employees bent on enriching themselves.

More than a dozen former executives have pleaded guilty to taking part in the scheme, including all five of the company's one-time finance chiefs.

One of those men, William T. Owens, secretly agreed to wear a recording device sewn into his necktie at the behest of the FBI in an effort to implicate Scrushy in the conspiracy.

Wednesday, jurors heard the first of two conversations Owens had with Scrushy on March 17, 2003. On the tape, Scrushy tells Owens and another subordinate about a sworn interview that Scrushy gave to the SEC three days earlier.

At the time, SEC lawyers were probing whether HealthSouth had improperly booked revenue under a new Medicare policy. They also were examining whether Scrushy had engaged in insider trading when he sold tens of millions of dollars in company stock in 2002, before the Medicare changes took hold.

But agency officials also asked Scrushy in the interview about whether quarterly financial statements he signed were accurate, he said on tape.

"Sure it's accurate," Scrushy said he told the SEC. "Everything in it's accurate, far as I know . . . to the best of my knowledge."

Owens later testified that Scrushy thought "that because the signature page on the document said 'to the best of my knowledge,' that limited his exposure and gave him an out in signing those documents."

Later in the tape, discussing a plan that would take HealthSouth private and give the executives time to clean up the company's books, Owens asked Scrushy whether a venture capitalist interested in the deal would overlook that HealthSouth faced a severe cash squeeze. Owens told the jury on Tuesday that HealthSouth's books reflected $400 million in cash that didn't exist.

"If he knew every -- just don't say anything in this office," Scrushy replied on tape. "I don't know, Bill. I don't know. Just come up with something creative."

Owens later told the jury that Scrushy "was concerned that our offices were bugged," and that the suites regularly were swept to look for recording devices. "There were places in the office where he chose not to carry on a conversation," Owens said.

The rest of the tapes, which include conversations between the men on March 18, are likely to consume the next two days of the trial.

Scrushy's legal team did get a boost from U.S. District Judge Karon O. Bowdre, who instructed jurors before the tapes began that "any gaps or holes or any missing links in the chain of custody go to the weight you must give those tapes." Defense lawyers James W. Parkman III and Arthur W. Leach contend that the tapes contain periodic gaps, which may compromise their accuracy. They also claim that, when heard in their entirety, the tapes could help exonerate their client.

Even so, the defense team strenuously objected to the government's use of tapes that had been enhanced for audio quality. The issue consumed hours of private arguments before the judge and required prosecutors to call two additional FBI employees to the witness stand. The judge ultimately sided with the government and allowed jurors to hear the more clear-sounding tapes.

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