Witness Says Analysts Doubted HealthSouth

Analysts saw unsettling financial numbers from HealthSouth Corp. but had no idea of the massive accounting fraud at the medical services chain until it unraveled, according to testimony Thursday at the trial of ousted Chief Executive Richard Scrushy.

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,” Rice said.

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 in U.S. District Court in Birmingham, Ala., that 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.

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 that 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, passed in 2002.