A secretly recorded conversation between HealthSouth’s former CEO, Richard Scrushy, and William Owens, a former chief financial officer, was entered into evidence in federal court late last week. The tape appears to show that Scrushy was aware of fraudulent accounting at the company.

Scrushy’s attorneys sought to discredit the recording before it could be played in court. But Judge Inge Johnson ruled in favor of the government, and excerpts of the conversation were played in court.

Scrushy, who was recently fired from the embattled company, is facing civil insider-trading and fraud charges from securities regulators. He allegedly took part in a conspiracy to deliberately overstate company earnings by $1.4 billion and assets by $800 million since 1999.

HealthSouth is the nation’s largest operator of rehabilitation hospitals and surgical clinics.

The tapes apparently show Scrushy telling Owens: “We just need to get those numbers where we want them to be. You’re my guy. You’ve got the technology and know-how.”

Owens is one of three former CFOs for the company who reportedly have agreed to cooperate with government probes of HealthSouth and Scrushy. According to Reuters, Owens agreed to an FBI request to wear a microphone to record the March 18 talk with Scrushy.

Scrushy has not yet been hit with criminal charges. But the taped conversation between him and Owens could well prove to be a key piece of evidence if the government brings a criminal case against the former HealthSouth CEO.

Owens and seven other former HealthSouth executives have pleaded guilty to criminal fraud and conspiracy charges in the mushrooming accounting scandal. Scrushy insists he’s done nothing wrong.

Ex-Gemstar CFO, CEO Sue SEC

Two executives have sued the Securities and Exchange Commission in the first legal challenge to the Sarbanes-Oxley Act. Henry Yuen, former chief executive of Gemstar-TV Guide International Inc., and Elsie Leung, the company’s former chief financial officer, are accusing the SEC of illegally withholding more than $37 million in severance payments they claim the company owes them, according to Law.com. Gemstar is a supplier of on-screen TV-programming guides.

In a complaint filed in U.S. District Court for the Central District of California, Yuen and Leung claim the commission, which has been investigating Gemstar for accounting irregularities, “injected itself” into severance negotiations the two executives were conducting with their employer. They also allege that the SEC then impounded the money and put it into escrow in violation of their constitutional due-process rights. They seek dissolution of the escrow account.

The SEC’s authority to freeze the assets of executives reportedly comes from section 1103 of Sarbanes-Oxley, which gives the agency the right to put into escrow assets of companies and executives the commission is investigating for possible securities-law violations.

To do so, however, the SEC must petition the court. Assets may be frozen for up to 90 days.

If the SEC brings a lawsuit in that time, the freeze may be extended indefinitely. But Yuen and Leung claim the SEC went beyond what the new law permits. They claim the commission used Gemstar as a proxy to strong-arm the two into agreeing to the asset freeze, instead of seeking a court order as required by law.

The plaintiffs’ lawyer, Stanley Arkin of New York’s Arkin Kaplan, said the complaint addresses the “unlawful, arrogant, and high-handed conduct” of the SEC.

Securities-law attorneys are keeping a close eye on the case. Roberta Karmel, a former SEC commissioner and a professor at Brooklyn Law School, told Law.com that the lawsuit might be a harbinger of things to come. She said the SEC is becoming much more aggressive about enforcement—much as it did in the wake of the insider-trading scandals of the late 1970s.

“The SEC has a lot more power because of Sarbanes-Oxley, and the current political climate in which any public company is presumed to be guilty before proven innocent,” Karmel told Law.com. “I think the SEC has to be very cautious or it will get caught up in situations in which it is accused of overreaching,” she added.

Legislators Looking to Alter 401(k) Plans

House lawmakers introduced a bill Friday that would boost the amount of money workers can put annually into retirement accounts such as 401(k)s and IRAs, according to Dow Jones Business Wire.

The bill, which was sponsored by Reps. Rob Portman (R-Ohio) and Ben Cardin (D-Md.), would provide a new formula to determine the interest rate companies use to calculate pension benefits. These calculations have traditionally been tied to the 30-year Treasury bond.

The bill would also allow employees to save a maximum $15,000 in their 401(k)s and similar accounts starting next year, up from $13,000. Workers over age 50 would also be able to contribute an additional $5,000. The top contribution limits for SIMPLE plans would be $10,000, with a $5,000 ceiling for IRAs. Those over the age of 50 would be able to contribute a total of $6,000 to IRA accounts, as well.

In addition, the bill would push back the age that retirees must start taking distributions from their retirement savings. Currently, seniors must start receiving payments from those accounts at 70 1/2. The proposal would change the mandatory distribution age to 75. Retirees would also be able to take money from their retirement accounts to pay for health-care premiums on a pretax basis.

The bill contains several measures designed to make it easier for small businesses to offer retirement-saving vehicles to workers. It would also reverse the law requiring small companies to pay payroll taxes and make contributions to worker retirement plans.

Further, the legislation aims to address corporate abuses by imposing an excise tax on excessive contributions made to senior executives in the period prior to bankruptcy.

Short Takes

  • Cisco Systems management announced that it would grant stock options for about 75 million shares of its common stock to its employees. It’s the first time that Cisco has disclosed the timing or pricing of an option grant in a filing with the SEC. The options carry an exercise price of $13.04 a share, the closing price on Nasdaq on Thursday. A company spokesperson told Reuters that Cisco does not consider the information material, but decided to included it as a way of improving the quality and clarity of financial disclosures provided to investors.
  • Executives at Walt Disney World say SARS, the pneumonia-like illness sweeping Asia, could deliver another blow to already slumping visits. The Burbank, California-based Disney recently cut its profit target for 2003, citing the effects of the U.S. war on Iraq and terrorism fears, as well as the slow economy. Disney repeated those concerns in the filing with securities regulators late on Thursday, which outlined terms and risk factors to a debt offering. In that filing, the media giant also noted the potential for SARS, or severe acute respiratory syndrome, to disrupt business.
  • Management at Tenet Healthcare, the nation’s second-largest hospital chain, have filed a federal lawsuit against a dissident shareholder who allegedly tried to overthrow its board of directors for the second time in two years. The lawsuit, filed in a Los Angeles federal court, accused the Tenet shareholder committee and its chairman, Lee Pearce, of using an allegedly misleading press release issued in April to illegally influence shareholders as part of a proxy fight he plans to launch.

“The press release is clearly intended to influence shareholders by directly attacking management through false and misleading statements about Tenet’s potential financial liabilities and is part of a continuous plan intended to end in the solicitation of a proxy,” the lawsuit stated.

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