As HealthSouth Corp., Birmingham, Ala., founder Richard Scrushy appeared in federal court last week and prosecutors played a secretly recorded conversation between him and the company's former chief financial officer, the embattled rehabilitation company continued to work behind the scenes with bondholders and creditors to avert a bankruptcy filing.
Arriving in U.S. District Court in Birmingham for the first time since HealthSouth was accused of massive accounting fraud by the Securities and Exchange Commission last month, Scrushy availed himself of his constitutional right to avoid self-incrimination and refused to answer more than 40 questions from federal prosecutors. Scrushy appeared in court for a hearing to determine whether he would be permitted to access about $70 million of his personal assets, which have been frozen during the investigation. Late last week, prosecutors played a tape of Scrushy and former CFO William Owens discussing some of the company's accounting practices.At deadline, no criminal charges had been filed against Scrushy, according to the court.
Scrushy would not answer questions because of a criminal indictment "that is about to drop," Thomas Sjoblom, his attorney, told the court, according to a hearing transcript. Scrushy has requested roughly $10 million for living expenses, $30 million for legal costs and $30 million for tax payments.
As the federal probe continues, HealthSouth's interim management team-led by acting Chairman Joel Gordon and acting Chief Executive Officer Robert May-asked creditors and others owed money by HealthSouth for a one- to two-month grace period to assess the company's financial condition and create a new payment schedule.
HealthSouth missed an April 1 bond payment of more than $350 million and currently faces roughly $3.2 billion in debt. Last week, the company announced it had reached an agreement with its bank lenders, headed by JPMorgan Chase Bank and Wachovia Securities, to extend its $1.25 billion credit facility through May 1. The company's creditors have not made moves to force the company into bankruptcy.
Also last week, HealthSouth adopted new corporate governance guidelines to assert the board's independence from Scrushy. The linchpin of the new company guidelines, which became effective April 4, is a call for the majority of HealthSouth directors to be independent from management, a criticism the board has shouldered for some time. Nonmanagement directors are expected to announce at least one new director soon, HealthSouth officials said. Newly appointed Independent Director Betsy Atkins stepped down March 25, after less than three weeks on the board. Under the new guidelines, which include a revised conflict-of-interest policy, HealthSouth will require each director to invest a minimum of $100,000 in common stock of the company within three years of initial election.
Meanwhile, former HealthSouth CFO Michael Martin, 42, last week became the ninth person charged in the federal government's probe of securities fraud at the firm. Martin, who was involved in various accounting positions since 1989 and served as CFO from October 1997 to February 2000, has agreed to cooperate in the case, Justice officials said. He follows Kenneth Livesay, HealthSouth's chief information officer, who pleaded guilty to falsifying financial records earlier this month (See related story, p. 15). Martin was expected to plead guilty to three counts of wire and securities fraud and falsifying financial information last week, but the plea was not accepted by a federal judge.