Overt Fraud Described at HealthSouth

A chief mechanic of the huge fraud at HealthSouth Corp. choked back tears Wednesday at the federal trial of fired Chief Executive Richard Scrushy as he testified that an exciting, visionary company resorted to bogus numbers when it couldn’t meet earnings forecasts.

Former assistant controller Ken Livesay said he and other members of a group called “the family” ditched “aggressive accounting” practices and began inserting outright fraud into HealthSouth’s books when Wall Street expectations outstripped the ability of the rehabilitation giant to make money.

“At some point in 1996, we crossed the line. We could no longer use those aggressive methods,” he testified at the Birmingham, Ala., trial. “We crossed the line from gray to black.”

Livesay said he would download the company’s true earnings into his computer, figure out how much fraud was needed to meet analysts’ earnings expectations, and pass along the figures to two superiors in finance, Bill Owens and Mike Martin.

“They’d instruct me that ‘we need to fill in that gap,’ basically. So I’d figure out ways to make that happen,” said Livesay, who pleaded guilty and cooperated with prosecutors.

Owens and Martin, who also have pleaded guilty, repeatedly said Scrushy was aware of the fraud, Livesay said.

Prosecutors claim Scrushy was behind a scheme to inflate HealthSouth earnings by about $2.7 billion and made millions from the conspiracy through stock sales, bonuses and salary. Scrushy is accused of conspiracy, fraud, money laundering, obstruction of justice and perjury.