Keeping Secrets

According to Martin's testimony, his 11-year tenure at HealthSouth was punctuated by threats to leave, which several times convinced Scrushy to lower earnings estimates. But after Martin finally did leave in 2000 (after three years as CFO), HealthSouth lent about $45 million to a company he subsequently formed, which he then used to buy four properties from his former employer. The loans weren't put up for board approval, and neither the loans nor Martin's involvement was disclosed when the company reported the sales in Securities and Exchange Commission filings.

Upon Martin's departure, controller Bill Owens stepped in as HealthSouth's third CFO. Like his predecessors, Owens was a local boy. (When asked to surrender his passport in order to be released on bail, he said he'd never left the country, except to go to Mexico, and so didn't have one.) He had attended Troy University in southern Alabama, become a CPA, and worked for Ernst & Young (then Ernst & Whinney) in Birmingham for five years before joining HealthSouth as controller in 1986. E&Y audited HealthSouth until 2003.

After just one year as CFO, Owens moved up to COO in August 2001 and, for about six months, CEO. That paved the way for CFO number four, Wes Smith, who had joined the company as director of reimbursements in 1987 and became controller and senior vice president, finance, in March 2000.

Smith, a CPA, graduated from the University of North Alabama in 1982 with a BS in accounting and, like Owens, worked for E&Y's Birmingham office before Owens recruited him to HealthSouth. He and Owens were close friends; in fact, Owens is godfather to one of Smith's children.

Like Owens, Smith lasted just a year in the CFO slot. He left in 2002 after marrying another HealthSouth senior vice president of finance, Susan Jones, and realizing, some speculate, that the passage of Sarbanes-Oxley could implicate his wife as well as himself. To keep Smith on board, Scrushy apparently placated him with roles that removed him from the fraud, including a spot as vice president of inpatient services, where he remained until the indictment.

Enter CFO number five, Tadd McVay. McVay, who became CFO in late August 2002, had joined HealthSouth in 1999 after a stint as CFO of Capstone Capital Corp., a Scrushy-controlled firm. An undergraduate English major with an MBA from the University of North Carolina at Chapel Hill, McVay helped HealthSouth refinance its long-term debt in 2002. His attorney, J. Don Foster of Jackson, Foster & Graham, describes him as a "devoted father" and a "very bright guy."

McVay has testified that he didn't know how pervasive the fraud was until his promotion to CFO. In that role, he says, he became the sounding board for analysts and investors who were "ranting and raving" about Scrushy as earnings shortfalls emerged, he says, and begging McVay to get rid of him.

In response, McVay convened a meeting at his home in November 2002 with Owens and corporate counsel William Horton to discuss Scrushy's ouster, only to have Owens turn around and inform Scrushy. Afraid of losing his job, McVay backed off. According to McVay's testimony, "Mr. Scrushy assured me that he and Mr. Owens were committed to correcting the inflation of the cash and [said] that all companies fudge their numbers." Owens, too, said he had been comforted by Scrushy's promise that he would take care of Owens's family if anything were to happen to him.

By January 2003, however, Scrushy had demoted McVay to treasurer and pulled Owens back into the CFO spot. Owens remained CFO through March 2003, when he turned informant for the FBI.

The Question of Motive
The HealthSouth scandal is distinguished by the duration of the fraud, and the number of CFOs who participated in it. Why did so many conspire for so long? "If you were rational and just balanced risk versus reward, you would never do something like this," says Robert Prentice, professor of business law at the McCombs School of Business at the University of Texas at Austin.

Scrushy clearly fits the profile of the overbearing CEO who, like Bernard Ebbers, Jeffrey Skilling, and Dennis Kozlowski, sets the wrong tone at the top. Certainly, Scrushy's powerful personality was a major factor in keeping the scheme a secret for so long. (Having installed security cameras throughout headquarters to keep watch on his employees, he generally allowed the rank-and-file into his executive suite only to berate them.)

But many other factors also made HealthSouth susceptible to fraud. "I wish I could say it was all about Scrushy, but I can't," says Edwin Hartman, director of the Prudential Business Ethics Center at Rutgers University. "There's a lot of research that suggests a HealthSouth could happen anywhere."

Greed, of course, played a role. Large stock sales by Scrushy and Martin provided a motive to prop up the stock. "Even though we knew we were committing fraud, we felt it was important to keep the stock price up for at least a year," Martin testified regarding a 1997 period in which he sold $3 million worth of shares and Scrushy sold $100 million.

In general, the executives caught in corporate scandals so far "have been underqualified and overpaid for the positions they held," says Jonathan Schiff, founder of the Finance Development & Training Institute. Certainly the CFOs of HealthSouth, like their peers at Enron, WorldCom, and Tyco International, reached the top at an early age.

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