<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:89963.wais]
THE FINANCIAL COLLAPSE OF HEALTHSOUTH
Part 1
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 16, 2003
__________
Serial No. 108-53
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida Ranking Member
RICHARD BURR, North Carolina DIANA DeGETTE, Colorado
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
Vice Chairman HENRY A. WAXMAN, California
MIKE FERGUSON, New Jersey BOBBY L. RUSH, Illinois
MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cohen, Martin, Senior Managing Director, FTI Consulting...... 28
Cullison, Kelly, former Vice President of Compliance,
HealthSouth Corporation.................................... 30
Goodreau, James, former Chief of Security, HealthSouth
Corporation................................................ 75
Hale, Brandon, former Executive Vice President of
Administration, Corporate Security and Compliance Officer,
HealthSouth Corporation.................................... 75
Henze, Diana, Assistant Controller, HealthSouth Coorporation. 21
Horton, William, former Executive Vice President and
Corporate Counsel, HealthSouth Corporation................. 75
Jones-Smith, Susan, former Vice President of Finance and
Reimbursement, HealthSouth Corporation..................... 19
Sanders, Teresa, former Group Vice President and Chief
Auditing Officer of HealthSouth Corporation................ 24
Schlatter, Steve, former HealthSouth Physical Therapist...... 26
Scrushy, Richard, former Chairman and CEO, HealthSouth
Corporation................................................ 16
Smith, Greg, Chief Auditing officer, HealthSouth Corporation. 32
Tanner, Anthony, founder and former Corporate Secretary and
Compliance Officer, HealthSouth Corporation................ 75
Vines, Michael, former HealthSouth Employee, Corporate Fixed
Assets Department.......................................... 27
(iii)
THE FINANCIAL COLLAPSE OF HEALTHSOUTH
----------
THURSDAY, OCTOBER 16, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2123, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Members present: Representatives Greenwood, Bilirakis,
Stearns, Burr, Bass, Walden, Ferguson, Rogers, Tauzin (ex
officio), and DeGette.
Staff present: Casey Hemard, majority counsel; Kelli
Andrews, majority counsel; Ann Washington, majority counsel;
Yong Choe, legislative clerk; Edith Holleman, minority counsel;
and Voncille Hines, research assistant.
Mr. Greenwood. The hearing of the Committee on Energy and
Commerce Subcommittee on Oversight and Investigations will come
to order, and the Chair recognizes himself for the purpose of
making an opening statement.
This morning we hold the first day of our hearing to
examine allegations of accounting fraud and poor corporate
governance policies at HealthSouth, the largest provider of
outpatient rehabilitation services in the United States. This
committee has a well recognized history of bringing important
matters of corporate governance and accounting fraud to the
forefront of public awareness in a timely and thorough fashion.
In the last Congress, this Committee took the lead in
examining the corporate governance practices and accounting
fraud allegations associated with the financial collapse of
several companies, all of which were in industries that fell
within with the Energy and Commerce Committee's broad
jurisdictional ground. For example, the Enron investigation
focused on corporate governance practices and accounting
matters associated with the energy industry. Questionable
accounting practices at telecommunication companies were
brought to light during our hearings last year on Qwest and
Global Crossing.
We now turn to another area that falls within this
committee's jurisdiction, the health care industry. The
HealthSouth hearings will provide this committee the
opportunity to examine various corporate governance and
accounting issues as they apply to and as they may impact the
health care industry specifically.
The importance of having congressional hearings on matters
effecting the investing public cannot be over emphasized. Due
in large to the work of this committee, last year Congress
passed and President Bush signed into law historic corporate
reform legislation, legislation that addressed many corporate
governance and accounting matters that were first brought to
the public's attention by our hearings.
While investigations by other branches of the government
can last months, even years, timely congressional hearings can
result in changes that benefit the public sooner rather than
later.
With respect to the HealthSouth investigation, on March 19
of this year the first of 15 former HealthSouth officers plead
guilty to a variety of Federal charges including conspiracy to
commit wire fraud, securities fraud, falsifying books and
records, falsification of financial information filed with the
SEC, bank fraud and conspiracy to make false statements to
auditors. Incredibly, all five of the company's chief financial
officer spanning a period of over 15 years have plead guilty to
a variety of these Federal offense. Guilty pleas also have been
obtained from several controllers and treasurers of the
company.
The essence of the fraud was similar to those we have
witnessed in the past. It involved the use of inappropriate
accounting practices to hide expenses and inflate revenues. All
in an attempt to meet Wall Street's earnings expectations.
What is unique in this case is how the company's senior
officers crafted an elaborate ruse to come clean with Wall
Street about true projected earnings once it became obvious
that they would need to do so by blaming a Medicare billing
policy clarification on group therapy reimbursement, known as
Transmittal 1753, for an immediate and ongoing $175 million
annual hit to its books.
The reality, as we will hear today, is that this policy
clarification would have little immediate impact and
questionable long term impact on HealthSouth's finances. The
last man standing after this wave of admissions and guilty
pleas is the founder and former chairman and CEO of the company
Richard Scrushy. Notably, every CFO as well as other senior
officer of HealthSouth have stated under oath that Mr. Scrushy
directed them to falsify HealthSouth's public financial
statements.
Mr. Scrushy appears before this committee today
voluntarily, but has advised us that he will not testify and
plans to assert his Fifth Amendment right not to incriminate
himself. This committee, as always, respects this assertion.
However, I am deeply troubled by this decision given that just
4 days before this hearing Mr. Scrushy granted a no holes
barred interview to ``60 Minutes'' without his attorney
present. To agreed to answer the questions put to him by a
reporter, but now refuses to answer questions put to him by the
representatives of the investing public who lost so much money
in the almost total dissemination of HealthSouth's stock last
year.
This begs the question why is Mr. Scrushy unwilling to
answer here today under oath some of the same exact same
questions asked of him by a reporter? I also wanted to know why
it is that in the 3 months leading up to the company's
announcement of the purported $175 million impact of
Transmittal 1753, an announcement that sent HealthSouth's stock
plummeting and the company to the brink of bankruptcy, Mr.
Scrushy disposed of 75 percent of his HealthSouth stock worth
nearly $100 million? This fact is even more suspicious given
that Mr. Scrushy had not engaged in any stock sales for the 5
preceding years.
Although we likely will not hear answers from Mr. Scrushy
today to these and other questions, we will hear from other
witnesses about the intimidating nature of the corporate
environment and its domineering chairman and how he made
employees feel that if they ever told him something he did not
want to hear or pointed out any internal problems, they would
lose their jobs.
We will hear how Mr. Scrushy installed hidden cameras to
keep watch over his empire and had himself accompanied by an
armed bodyguard even while in his own company's corporate
office.
Several employees will tell us that one reason they did not
use the fraud hotline set up by HealthSouth and touted by Mr.
Scrushy as a way to report fraud allegations within the
company, was that they feared that the hotline was, in fact,
monitored by HealthSouth's security and their identity could be
uncovered.
We also will hear testimony from a witness who reported her
suspicion about fraud occurring at the company by senior
management 3 years before the HealthSouth case broke. However,
as the committee has learned, the corporate compliance officer
who took charge of the investigation directed that the case be
closed and no paperwork substantiating any investigation that
he did exists today.
All of these matters raise distributing questions about the
corporate culture established by Mr. Scrushy and the extent to
which the company under Mr. Scrushy's leadership allowed its
internal controls and compliance efforts to be weak or
nonexistent. They also raise serious questions about the
adequacy of efforts by HealthSouth's Board, it's outside
auditors and other extensible independent actors to properly
oversee this company and protect the interests of investors, a
subject for our next day of hearing into this matter.
Following our hearing into the Enron scandal, this Congress
passed historic legislation to reform some of these corporate
abuses. To some degree we are already seeing the benefit of
that legislation in this case as the personal certifications of
company books now required by senior officers reported led one
or more of HealthSouth's CFOs to think twice and go to the
Justice Department instead. However, I cannot help but be
amazed that even in the post Enron environment HealthSouth's
corporate chiefs, board members and outside experts would
either participate in or fail to properly undercover and stop
such blatant accounting scams. How could this have occurred?
Certainly Mr. Scrushy had it at least partially right when he
said on ``60 Minutes'' the other night that there are
incredible financial and other incentives for corporate chiefs
to cook the book because of promotions, raises, bonuses, stock
options and just plain old greed. If that is true, then we must
question whether any legislation will ever be sufficient to
deter such behavior.
Perhaps it comes down to the ethical and cultural climate
fostered by those at the top of these companies, which is why
it is so appropriate to start this hearing with Mr. Scrushy
himself.
I want to thank all of the witnesses for attending.
I now recognize the lady from Colorado, Ms. DeGette, for an
opening statement.
Ms. DeGette. Thank you, Mr. Chairman, for holding this very
important hearing on the fraud that nearly brought down the $4
billion HealthSouth Corporation.
This committee has developed an enviable record in exposing
and investigating fraud as some of the largest companies in
this country, including Enron and WorldCom. In response to the
scandals at Enron and WorldCom, Congress passed the Sarbanes
Oxley Act which you referred to, which took a critical step in
increasing accountability and cracking down on corporate
malfeasance throughout corporate America. However, the
revolutions of the culture of deceit that pervaded HealthSouth
and the countless measures members of the management team took
in order to create and to protect their own fortunes reminds us
that corporate reform is, nevertheless, an issue that requires
our immediate attention.
Simply, the deception that permeated HealthSouth from the
management team to the board of directors to the internal and
external auditing teams is an absolute outrage. It is yet
another sobering instance of the triumph of creed and arrogance
over a company's fiduciary duty to its shareholders.
Accordingly, it's incumbent upon us as a legislative body to
send an unequivocal message that such crookedness should not
and will not be tolerated.
Unlike other cases that we've investigated in this
subcommittee, like Enron and WorldCom, the case of HealthSouth
has some unique characteristics. It's often difficult to prove
that a company's chairman and chief executive officer had
personal knowledge of a fraud. In this case however, as the
chairman mentioned, 5 chief financial officers covering the
period of HealthSouth's creation in 1984 to March 2003 have
plead guilty, and all of them have said that Richard Scrushy,
the company's chief executive officer directed them to make
changes in the company's financial books when the company
couldn't meet Wall Street's expectations; changes that
allegedly amounted to nearly $3 billion.
Meanwhile, Mr. Scrushy claims he's innocent but refuses to
tell this committee what he knows and what he doesn't know,
preferring I guess to go on national TV to say so. He claims
that these officers committed fraud, or at least he said on
Sunday the officers committed fraud to benefit themselves. But,
of course, he neglected to mention the biggest beneficiary of
the fraud and other questionable practices of HealthSouth was
Mr. Scrushy himself.
Our investigation has revealed a company with a
breathtaking lack of internal controls and one of the most
negligent boards that we've observed. The company was under the
total control of Mr. Scrushy with no countervailing corporate
governance system in place. By all accounts Mr. Scrushy ran
HealthSouth by intimidation and manipulation. He refused to
listen to top staff who told him what he didn't want to hear
and punished them by taking away responsibilities or playing
staff members against each other.
One of the board members has said that no employee could
stand up against Mr. Scrushy without expecting pay back. As a
result, the compliance officer who could have stopped this
fraud in 1999 failed to investigate credible allegations backed
up by documentary evidence which were actually admitted by the
controller.
The chief financial officer instructed him to placate the
complainant and the traditional internal controls were also
missing. The internal auditors who reported directly to Mr.
Scrushy by his orders could not look at the corporate books.
Ernst & Young, the external auditor, which should have picked
up on some of these weaknesses never once found a single
concern with the company's accounting practices or internal
controls. I understand they're coming in a few weeks, and I'm
looking forward to hearing them.
The HealthSouth board, stacked with personal friends of Mr.
Scrushy, was awash in conflicts of interests that benefits them
financially and functioned as a rubber stamp for Mr. Scrushy.
For example, the board agreed to reprice stock options
after they were granted to benefit Mr. Scrushy and the
officers.
The audit committee never met with the internal or external
auditor except to get perfunctory annual reports. The current
internal auditor did not meet with the audit committee for the
first 18 months of his tenure. The audit committee only met
once in 2001.
These weaknesses allows Mr. Scrushy and others to use
corporate funds to their own advantage. Mr. Scrushy had 7
corporate planes. He wanted to be a music entrepreneur, so he
spent a million dollars of HealthSouth's money on Third Phase,
a girl band that he hoped would be the next Destiny's Child.
The board approved a grant of 250,000 stock options to Tony
Mottola, then head of Sony Records, which subsequently signed
Third Phase to a record contract. But the board can't even
remember why they did it. And it goes on and on.
HealthSouth's so called code of ethics requires that all
potential conflicts of interests be approved. According to the
minutes provided to us, none of the conflicts were approved by
the board. Some of them, the board was not even aware of.
In every sense of the word HealthSouth failed the investing
public in its employees. And, frankly, they are the ones who
have paid the highest price; the shareholders and the
employees.
Mr. Chairman, thanks again for holding this hearing. I hope
we cannot only find out the corporate abuses with HealthSouth,
but also delve more into what we can do with accounting and
auditing firms, and the role of boards. Because I think those
are two areas ripe for legislation.
Mr. Greenwood. The Chair thanks the gentlelady and
recognizes for purposes of an opening statement, the Chairman
of the full Committee, the gentleman from Louisiana, Mr.
Tauzin.
Chairman Tauzin. Thank you, Chairman Greenwood.
And let me first begin by saying how much the whole
Committee appreciates the hard work you and ranking Democrat
Ms. DeGette and the staff on both sides of the aisles have done
on behalf of the committee with respect to these corporate
governance and accounting fraud cases.
This morning we begin our examination of the financial
collapse of HealthSouth. At its peak this company, reporting
its operations in 50 States and worldwide, was producing about
$4 billion a year in revenues. Today we know that figure was
grossly inflated. And we know these numbers were made up by
cooking the HealthSouth books over a multiple year period. In
fact, currently the companies forensic accountants indicate
approximately $3 billion in fraudulent accounting entries. That
puts this fraud in the class of the WorldCom fraud we looked at
earlier.
Today we know, as the Chairman pointed out, the 15 former
employees of the company, most of them senior management
people, have plead guilty to a range of criminal charges
arising out of this fraud.
We also know that, like some other cases we examined, the
committee has learned that there was shredding of documents
responsive to the SEC inquiry in this case, and to the
Fulbright review attempt in 2002 to examine one of the aspects
of the case.
And we know that shredding occurred in a restricted area, a
restricted access area in which the chairman, Mr. Scrushy and 4
other executive officers were located. We obviously don't know
yet who did the shredding, but we know where it occurred in
this restricted area and we know the shredding was, obviously,
of documents responsive to these investigations and
examinations.
So we have to ask once again how did such a vast
conspiracy, how could that have occurred in a Fortune 500
company which is publicly trade and in which millions of
Americans, many pension holders, invest?
When people in this country make decisions about where to
invest their hard dollars, when pension funds and others place
their sacred trust dollars into these businesses, everyone
should be able to rely upon established safeguards to ensure
that the numbers they are looking at are real. Those safeguards
include internal controls, financial disclosures, corporate
compliance programs, board independence and external auditing.
All to ensure that investors can trust the numbers they are
looking at. In the case of HealthSouth and some of the other
cases we have examined, these safeguards resoundingly failed
and Congress and the American public have a right to know why.
It will be interesting, Mr. Chairman, to examine as we
learn all the fact in this case how the new statute that was
passed by Congress would have changed, if it would have changed
the results in this case if this fraud would have been
discovered early, if this fraud could have been prevented. And
from this examination we may learn whether the act we passed
can and will work as well as we hope it will.
This examination is also relevant because we are in the
middle of a Medicare conference. We are examining a health care
company, a health care company that made claims against CMS,
the agency that expends funds for Medicare and Medicaid, a
system that is hard pressed to satisfy the needs of Americans
in terms of maintaining and taking care of health problems in
this country, particularly for our seniors. And so this
examination has relevance on a number of different levels.
As a pointed out, we call the chairman of the board, Mr.
Scrushy. Our job is not to prosecute people here. Our job is to
learn what went wrong. To learn from it, and to establish
policy to prevent it in the future. But we are not going to
learn a lot from Mr. Scrushy today, other than what we have
learned on ``60 Minutes'' while he was willing to talk to ``60
Minutes'' reporters without the benefit of an attorney, my
understanding he will take the Fifth this morning. And while we
certainly respect the rights afford to him under the
Constitution to refuse to incriminate himself, we really
question why he felt it was appropriate to discuss this story
to a television journalist when he is unwilling to do so before
Congress today.
We look forward to hearing the testimony of current and
former employees of the company who, in fact, raised concerns
about irregularities that they observed during the period of
the fraud, only to be punished or berated for bringing it to
the attention of officers of the company. Have we heard that
before in some of these investigations?
Let me also thank you all for coming to testify today. If
management had listened to your concerns when you brought them
up several years ago, maybe HealthSouth would not have been
forced to the brink of bankruptcy. An important company that
delivers important health care services to Americans would not
have been put in such an awful position.
We will hear from former members of the management team and
employees who were integrally involved in the company's
internal control and compliance activities. Perhaps they can
shed some light on why these processes failed so dramatically
and whether or not the new Sarbanes Oxley Bill will help cure
those problems.
This committee has been examining these HealthSouth issues
for 6 months. And, again, I want to thank you all for the
extraordinary hard work you have done, Mr. Chairman and Ms.
DeGette, and the members of your staff. But as you know, we
have been looking at these kind of problems in various sectors
of the economy that fall under this Committee's jurisdiction.
Enron in the energy sector, WorldCom, Global Crossing, Qwest in
the telecom sector. ImClone and now HealthSouth in the health
care sector. In each of these cases we have pursued these
investigations because of the transparency, the accuracy, the
credibility of financial statements are simply essential to the
smooth functioning of competitive markets. And they're
absolutely critical to instill the requisite confidence in the
investing public necessary to support our capital system.
Thankfully, perhaps as a result of the hearings we have held,
perhaps as a result of the Sarbanes Oxley Bill, perhaps as a
result of the extraordinary changes that are occurring in board
rooms across America, Americans are beginning to feel some
confidence again in the marketplace.
Today we take one more step in ensuring the problems that
occurred at HealthSouth and the damage done to the investing
public, to the workers who tried to build a great company only
to find that their leadership in the company let them down; we
take one more step in establishing and reestablishing
confidence of Americans and investors in this marketplace.
We have got a lot of ground to cover, so Mr. Chairman, I
will yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for the purposes of an opening statement the vice
chairman of the subcommittee, the gentleman from Oregon, Mr.
Walden.
Mr. Walden. Thank you very much, Mr. Chairman. And thank
you for convening this hearing, the first in a series that
examines the collapse of HealthSouth.
A year and a half ago Congress passed laws in the wake of
the frauds and tumultuous bankruptcies of Enron and Global
Crossing to protect workers and investors in publicly traded
corporations by improving the accuracy of corporate financial
disclosures and increasing supervision of accountants that
audit public companies. As a result, the Securities and
Exchange Commission has set standards to ensure that corporate
financial disclosures are complete, transparent and provide an
accurate picture of a company's financial health. I question if
HealthSouth heeded any of the methodologies that Congress
established to check and balance the financial underpinnings of
publicly trade corporations.
I am troubled by charges included in the complaint filed in
the U.S. District Court of the Northern Alabama by the SEC that
claims that between 1999 and 2002 when HealthSouth's earnings
fell short of Wall Street's earnings estimates, Mr. Scrushy,
CEO of HealthSouth, directed accounting personnel to ``fix it''
by artificially inflating the company's earnings to match Wall
Street's expectations. This type of alleged fraud is exactly
what Congress is attempting to root out when we passed the
landmark Sarbanes Oxley Corporate Accountability Act. Was
anyone accountable at HealthSouth under Mr. Scrushy's
leadership?
As long as corporate executives feel they are above the law
and not accountable to each and every shareholder, Congress
will hold them accountable for their actions or inactions.
Reforming accounting oversight and enhancing corporate
disclosure are critical to increasing and maintaining investor
confidence in our Nation's corporations. Without this
confidence, private investment will plummet and our economy
will suffer.
The ``60 Minutes'' piece that aired on Sunday night told a
story of a night that had a vision and worked tirelessly to
make his vision a reality. He built a health care empire that
provided rehabilitative care to patients coast to coast and
employed tens of thousands. That company, HealthSouth, would
still be a struggling small business scraping capital together
if it were not for the confidence that investors and
shareholders afford Richard Scrushy in the mid 1980's when
HealthSouth began to be publicly traded.
Each time an Enron, WorldCom, Global Crossing or
HealthSouth scandal surfaces investor confidence is severely
eroded. Without investor confidence, the free enterprise system
falters. This sets of a domino effect throughout our economy.
It is extraordinary to me that this company paid more to
Ernst & Young to check its trash cans and toilets than it paid
to audit its books and its revenues and expenditures. It is
absolutely outrages.
One of my colleagues mentioned that there was a
breathtaking lacking of internal control. And, indeed, from a
normal sense of business practice that is true. But it begins
to look like there was an extraordinary system of internal
control right at the top that prevented internal auditors from
accessing the books and records they needed to access. There is
a total failure here in how this company was reviewed, audited
and the information that flowed out to investors.
I spent 5 years on a community bank board and served on an
audit committee. I am outraged at the practices that I read
about that took place here. It's unexcusable, it's
unacceptable, it will not be tolerated.
Mr. Chairman, I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for an opening statement the gentleman from North
Carolina, Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman.
Mr. Chairman, this has become too much of a commonplace
thing for this Committee that we have a piece of corporate
America in front of the Oversight Committee. Because of the
fact that they let down the trust of their investors, their
employees, that there potentially was fraud. I would remind
everybody, we are not a court. We have a very important role to
play, and it is why I think this hearing is going on.
We have a policy mission as it relates to Medicare and
Medicaid that a lot of times people do not believe that our
eyes are on the right thing. To understand it in total it means
that you have to look at everything that has an effect on it.
Fraud within that system has a huge effect. It is very
appropriate for this Committee to look at this issue, and to
look at it in whatever detail helps us to understand what
happened, why it happened. Because our challenge is to make
sure that we design a system that does not allow it to happen,
whether it is this company or another company, or another
entity in the future.
Clearly there is a legal process that those that need to go
through will go through. But I hope that those that are here
today understand that this committee through this subcommittee
are focused on the changes, if any, that we need to make to
make sure that in the future this cannot happen. Not that it
does not. We understand that individual creed maybe does drive
people to do things that they know are wrong. It does not mean
that we have to create a system or allow one to stay in place
that makes it easy for them to make that decision.
So I do appreciate the Chairman's willingness to do this,
and I know this will not be the last time that we are forced to
have a hearing in Oversight that does this, but I do thank the
Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes for an opening statement the gentleman from New
Jersey, Mr. Ferguson.
Mr. Ferguson. Thank you, Mr. Chairman. Thank you for
holding this important hearing on the massive and comprehensive
fraud perpetrated by executives at HealthSouth.
First of all, we have to remember and think of the people
at the FBI and the SEC, and the Department of Justice. They
should be commended for their diligence in pursuing this matter
and helping uncover the deceptive and illegal scheme that is
simply business as usual for the executive team at HealthSouth.
Listen to the words that the FBI and the U.S. Attorney have
used to describe the criminal HealthSouth's activities.
``Securities fraud, tax fraud, bank fraud, accounting fraud,
wire fraud, criminal conspiracy.'' Clearly the authorities must
continue their hard work until justice is served for all those
who are guilty of deceptive and unlawful business practices.
Mr. Chairman, as you have noted, 15 people have already
plead guilty in this case. These are 15 seemingly everyday
people who have been branded as felons and will spend time in
jail, possibly, for their criminal actions. At HealthSouth it
was the culture from top to bottom to carry out this fraudulent
scheme with the executive team.
As a U.S. Attorney said in a recent press release,
``HealthSouth does not represent a mere accounting fraud, but
rather a business scheme to fraudulent boost HealthSouth's
reported earnings.'' The U.S. Attorney continued ``HealthSouth
executives concealed the scheme to fraudulently inflate
earnings from the investing public, the auditors and government
regulators and willfully and knowingly made false and
misleading statements to auditors and omitted material facts in
order to mislead their accountants''--even misleading their
accountants--``in connection with an audit of HealthSouth's
financial statement.''
I am interested to hear how such a massive and
comprehensive fraud could have been orchestrated.
Unfortunately, we will not be hearing, seemingly, from the
captain of the ship at HealthSouth. Many have suggested that
Mr. Scrushy, founder and former CEO of the company, initiated
and masterminded this fraud. We may not get any answers from
Mr. Scrushy today, but we will learn a great deal about the
fraud at HealthSouth.
But if there is one thing that I hope that we will learn
from this hearing, and all America will learn from this
hearing, is that those who run America's companies will
continue to get the message; that if you are committing fraud,
you will be caught and there will be a dear price to pay.
Thank you, Mr. Chairman. I look forward to hearing from our
witnesses, and I yield back.
Mr. Greenwood. The Chair thanks gentleman and recognizes
for his opening statement the gentleman from Florida, Mr.
Stearns.
Mr. Stearns. Good morning. And thank you, Mr. Chairman, for
holding this subcommittee hearing.
Now here we go again. We have been through this with other
companies, and obviously it's disheartening to see that this
committee has to continue to investigate corporate malfeasance
and whether this financial fraud is committed by accounting
firms, like Arther Anderson, or energy companies or
conglomerates, it is all disappointing again this morning to be
here.
There is a branch of HealthSouth chain in my hometown of
Ocala, Florida. My constituents have used it for years and
families in Ocala and throughout central Florida depend upon
the jobs there.
HealthSouth had its executives come into my office here in
Washington to lobby me and my staff. One of the concerns they
had were they want a more lucrative classification dealing with
Medicare reimbursement for therapy, the 75 percent rule so
called. And they wanted to make themselves more available for
this. And one of their arguments was they needed it for their
bottom line.
It is not wrong to lobby me, obviously. But myself and my
staff trust that when they come in and to make their arguments
in their presentation about their finances for their firm that
they are accurate. Issues like the senior Transmittal 1753,
which deals with it. And then to see to Mr. Scrushy's
mysterious stock option sale, you know, 3 days prior to that
memo casts doubt on that trust.
Mr. Chairman, the Department of Defense put up the 52 most
wanted people in Iraq. My colleagues, there are now two
websites that have come up with the most wanted executives. One
of them is called Shareholders Most Wanted The Original Greedy
Executive Card Deck. And they show a royal flush here including
Ken Lay and others.
Mr. Scrushy, I would think that you will be added to this
Shareholders Most Wanted list, The Original Greedy Executive so
we can see here a royal flush. You will probably replace even
some of the people on this list.
There is another, Stacked Deck, Corporate America's Least
Wanted, the original scandal list. It's a parody. It's a good
card set. It includes companies as well as individuals.
So, Mr. Chairman, we can see that the public is starting to
perceive, and that is why we are here.
Let me follow up a little bit on what my colleague from
North Carolina, Mr. Burr, indicated.
I was asked, well, why is this Committee investing? Why do
you not just send all this information to the Justice
Department or the FTC, or the SEC, why are you spending your
time here?
Well, we write the laws, and we write the laws on Medicare
reimbursement and security trading, and therefore we need to be
informed when these events do not proceed according to the law
that we passed. And that is why we are here today. We have a
fiduciary responsibility to taxpayers to understand it so we
can write the laws better.
So once again the committee will again examine the issues
of falsified accounting records, inflated share prices, the
role of executive compensation and the protection of corporate
and courageous whistleblowers. Besides jeopardizing patients
and employees, shady executives' practices lead to damaging
effects that ripple through this economy. Do not give the
shareholders the confidence they need to invest.
My colleagues, Mr. Chairman, integrity is the elixir that
attracts capital, bottom line. It leads to lifesaving
treatment. While deceit is a poison that erodes investor
confidence and hurts employees and possible patients.
So I look forward to the testimony, Mr. Chairman, this
morning. And I, again, compliment you on this hearing.
Mr. Greenwood. The Chair thanks the gentleman.
If there are no additional opening statements, at this time
the Chair will call forward our first witness, Mr. Richard
Scrushy, former Chairman and CEO of HealthSouth.
Mr. Scrushy, please come forward and be seated at the
table.
Good morning, sir.
Given that you have indicated through your counsel that you
will not answer the subcommittee's questions today, I want to
show you and the subcommittee members some excerpts from your
appearance on ``60 Minutes'' last Sunday night, an interview
that your own lawyers have said in a letter to this
subcommittee should ``serve any immediate public need for
information from you.''
So will the staff please start the video.
Mr. Wallace. You are supposed to be a crook. The SEC in
effect says you are. Your former financial officers, chief
financial officers say you are, that Richard Scrushy inflated
earnings and betrayed his stockholders, betrayed his employees.
Mr. Scrushy. There is no evidence of any of that. And
mainly what the people have said is not true.
Mr. Wallace. He told us his top financial officers
committed the fraud without his knowledge.
Mr. Scrushy. You have to rely, you have to trust people.
You have to believe--you have to delegate. I mean, you hire you
them, you pay them good salaries, you expect them to do the
right thing. And I signed off on the information based on what
was provided to me and what I was told.
Mr. Wallace. You say you did not keep track of the
accounting?
Mr. Scrushy. CEO's do not do that. CFOs do that.
Mr. Wallace. Who is that?
Mr. Scrushy. Chief financial officer means he is the chief
financial officer.
Mr. Wallace. Here is how the SEC describes what it calls
the scheme, your scheme. Each quarter HealthSouth senior
officers would present Scrushy with the company's actual
earnings and he would compare them to Wall Street expectations.
If the actual results fell short of expectations, Scrushy would
tell his management to ``fix it'' by recording false earnings
to make up for the shortfall.
Mr. Scrushy. That is not true.
Mr. Wallace. Scrushy's world first began to become apart
last March when one of his chief financial officers went to
Federal prosecutors and confessed that HealthSouth at Scrushy's
expressed direction had been overstating its profits hugely for
years. So far, 15 former HealthSouth employees have plead
guilty.
Michael Martin, Chief Financial Officer. Let me read from
the court transcript when he plead guilty. The judge asked
Michael Martin ``Did you Mr. Scrushy discuss in fact the
numbers contained in the filings were false?'' ``Yes, sir.''
``Did Mr. Scrushy direct you to do something with the
number?'' ``Yes, sir. He told me to inflate the numbers. To fix
the numbers so that they met Wall Street's expectations.''
Mr. Scrushy. So is Mike Martin just a dummy? Just some guy
says go do something to commit a fraud or a crime that would
put you in jail, and Mike Martin just does it? You don't
believe that, Mike.
I would never have done that. He is not telling the truth.
Mr. Wallace. Tad McVay, CFO until early this year, 2003,
plead guilty told the judge Richard Scrushy was aware that the
financial statement contained numbers that were incorrect.
Mr. Scrushy. This is--again, it is not true.
I have an--I have----
Mr. Wallace. All these guys are liars and you are a knight
in shining armor?
Mr. Scrushy. Mike, there are 50,000 people; there are 5--
you know, 5 people that have made these claims out of 50,000.
Let me make a comment.
Mr. Wallace. But you are in charge. Come on, you are----
Mr. Scrushy. It does not mean--it does not mean I am a--no,
I did not--I did not--no. This--you are not right.
Mr. Wallace. McVay told the judge you tried to justify it
by saying ``all companies play games with accounting.''
Mr. Scrushy. I never said that to him, and he knows that.
Mr. Wallace. Why would these chief financial officers, what
you are saying is they committed the fraud? For what reason?
Mr. Scrushy. I did not--I certainly did not commit the
fraud. People know me. They know I would not instruct somebody
to do that.
Mr. Wallace. What would be the motive of your CFOs to
commit a fraud?
Mr. Scrushy. I really do not want to get into it with you.
But every one of them has a motive.
Mr. Wallace. But then he did tell us what he believes
motivated his CFOs to falsely inflate earnings.
Mr. Scrushy. Promotions, bonuses, stock, stock options, an
opportunity to make a lot of money. There is incentives in it.
Tremendous incentives: Power, greed. There is a lot of reasons
for what they did. There is no motive for me to destroy a great
company that I built, a company that I loved, my fourth child.
There is no reason for me to do that.
Mr. Jones. He benefited more than anybody from this fraud.
There is no question about it, 100 times fold.
Mr. Wallace. Doug Jones, a former U.S. Attorney in
Birmingham has filed a class action suit against Scrushy on
behalf of stockholders who lost billions while Scrushy made
hundreds of millions dollars from the fraud. How?
Mr. Jones. In his stock options, his salaries and his
bonuses. And he has for years cultivated an image that this is
my company. I am the one that brought this company up. I had my
finger on the pulse. I know everything that is going on in this
company. I know the numbers. I know all that, I know all that
he told me, but I am not an accountant. He does not have to be
an accountant to direct this fraud. Other people may be the
ones sitting up there late at night crunching the numbers and
cooking the books. But that does not mean when he says fix it,
if that is true that he's not as much responsible for
engineering that train wreck as anybody else.
Mr. Wallace. When the public sees a report in The Wall
Street Journal and HealthSouth says hey, things look very, very
good for the next quarter or the next year or whatever, and
then people would be buying the stock and conceivably driving
up the price of the stock, right?
Mr. Scrushy. That is right.
Mr. Wallace. It's suggested that that was the motive for
you to inflate these figures because you were living high, you
wanted to that stock to be high and that is, apparently, what
people are saying is the motive for you to phony up the
figures.
Mr. Scrushy. Well, I didn't phony--first of all, I did not
phony up the figures.
Second of all, you got to look at my--my buying and
selling, okay?
Mr. Wallace. Yes.
Mr. Scrushy. I did not sell the stock at a high.
Mr. Wallace. The stock is now $3.
Mr. Scrushy. Yes.
Mr. Wallace. You sold $99 million worth of that stock
between $10 and $14.
Mr. Scrushy. When you build something from nothing, you
should have the right at some point to have some liquidity.
That is what every young MBA in America is working toward.
So what I did was, you know, the American dream.
Mr. Wallace. But you get out?
Mr. Scrushy. I did not--no, I didn't--I just got some of it
out. I did not--I just----
Mr. Wallace. You got a lot of it out, $99 million worth.
Mr. Scrushy. Yes. But I am saying----
Mr. Wallace. $99 million worth between $10 and $14, and all
of these other poor people, what are they doing?
Mr. Scrushy. Right. Right.
Mr. Wallace. They are sitting there waiting because they do
not know what you know.
Mr. Scrushy. Mike? Mike? Mike, I had stock options that
were going to go away, $99 million worth going away. It was
going away. It was done.
Mr. Wallace. Right.
Mr. Scrushy. I was going to lose it. What would you have
done? What would anybody have done?
Mr. Wallace. What he did was sell high, and to help keep it
high he regularly gave bullish profit predictions to Wall
Street analysts and interviewers.
Here is what he said on CNBC last year when the stock was
selling at $15.
Mr. Scrushy. Well, I think the companies should be offering
$20 a share right now. Certainly we should be higher than we
are now, but I would expect to see the company in the $20's,
and that is where we are headed, we believed.
Mr. Wallace. But just 12 days later Scrushy sold more than
5 million shares of his stock. Now HealthSouth board is barred
him from even entering any offices of the company he built and
HealthSouth now admits that none of his past profit numbers can
be trusted. The company is struggling to stay out of bankruptcy
and Scrushy is struggling to stay out of prison.
You would expect, I would imagine, the U.S. Attorney here
in Birmingham within what? Weeks to bring criminal charges
against you?
Mr. Scrushy. I do not expect that at all. I think an
objective review of the evidence will show that Richard Scrushy
was not involved in any of these alleged crimes. And they will
see that I was not part of that scheme.
Mr. Wallace. Scrushy still lives an over-the-top
millionaire's life, though now that his fate will probably be
decided by a jury in Birmingham, he wants to downplay his
wealth. He would not let us videotape his 4 mansions, nor his
antique car collection, nor his wine cellar.
I have seldom been in this position before, to talk to a
man of great accomplishments who maybe or maybe not went wrong
and who sits here and says the SEC is wrong, the prosecutors
are wrong, the chief financial officers are wrong, the world is
against me. They are all wrong and I am right. I am an
honorable man and they are just damn wrong.
Mr. Scrushy. Why do we not take the testimony of people who
are not felons, who are admitted liars and see what they have
to say. Let us get their testimony. They will not say the same
thing.
Mr. Wallace. You are not going to jail?
Mr. Scrushy. No. No, I am not going to jail. I am an
innocent man. I am not going to jail.
Mr. Greenwood. Mr. Scrushy, here is your opportunity to say
under oath what you said on ``60 Minutes''. Here is your
opportunity to answer questions and tell this Committee of
Congress what we need to know about HealthSouth under oath.
As you know, when we conduct an investigative hearing this
Committee has the practice of taking testimony under oath. Do
you have any objection to doing so?
You have to put your microphone on, Mr. Scrushy. There is a
little button there.
Mr. Scrushy. Is that one?
Mr. Greenwood. It is on.
Mr. Scrushy. Mr. Chairman, I would like to state my
position if it is----
Mr. Greenwood. Well, first, then in that case do you object
to giving your testimony under oath? We take testimony under
oath here.
Mr. Scrushy. Mr. Chairman, I am--I am going to state my--I
mean I am going to invoke the Fifth, but I would like to state
my position on that.
Mr. Greenwood. In that case, would you stand and raise your
right hand? You have to be sworn in before you say you state
your position. You can say anything you want for as long as you
want this morning, and we would love it if you would, but the
first thing you need to do is stand and raise your right hand
so I can place you under oath.
In case your lawyers are not making this clear for you, I
will.
If you wish to take the Fifth, assert your Fifth Amendment
rights, you may do so. But the first thing you do, even before
you assert those rights----
Mr. Scrushy. Yes, sir.
Mr. Greenwood. [continuing] is you need to be sworn in.
Mr. Scrushy. I understand.
Mr. Greenwood. Do you have any objections to----
Mr. Scrushy. No, sir.
Mr. Greenwood. Okay. Then would you please stand and raise
your right hand?
[Witness sworn.]
Mr. Greenwood. Okay. You are now under oath. And under the
rules of the House you are also advised that you have the right
to be advised by counsel as to your constitutional rights.
Could you please state for the record the names of the counsel
who are here today to advise you with respect to such matters?
Mr. Scrushy. Donald Watkins and Jonathan Wills.
Mr. Greenwood. Okay. The Chair now recognizes you for the
purpose of making an opening statement, if you so desire. Do
you desire to make an opening statement, sir?
Mr. Scrushy. Yes, sir, I do.
Mr. Greenwood. You may proceed.
TESTIMONY OF RICHARD SCRUSHY, FORMER CHAIRMAN AND CEO
HEALTHSOUTH
Mr. Scrushy. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, thank you for
the opportunity to appear here today.
Since the committee first wrote me, I asked my counsel to
try to arrange for a fair hearing where I could tell the truth
about the charges which have been made concerning me and
HealthSouth. ``60 Minutes'' gave me such an opportunity in the
media. I had hoped that the committee today at this hearing
would ask my accusers to make their charges against me under
oath, then I could answer them under oath. But the committee
has not called any of my accusers to testify today.
The committee wants me to answer charges without facing my
accusers. I do not believe this is fair. I am, therefore, by
advice of my counsel forced to take the Fifth Amendment today
until I can get a venue where I can face my accusers.
I hope the committee will let me come back someday under
more appropriate circumstances to testify fully about the
HealthSouth success story. By then, it will know more of the
true facts. It will also know that there is not, and has never
been any financial collapse of HealthSouth.
The only collapse has been the temporary one in the
HealthSouth stock price caused by the manner in which this
matter was investigated last March and the excess media
publicity generated.
Thank you, Mr. Chairman.
Mr. Greenwood. Thank you, Mr. Scrushy.
The Chair would note, Mr. Scrushy, that during your ``60
Minutes'', which I watched with my mother and father in their
home Sunday evening, your accusers were not there. You faced a
series of questions from a reporter and you openly--apparently
openly asked those questions. So the only difference that we
can see between then and now is that you are now under oath.
So I am going to ask you one of the questions that Mr.
Wallace asked you about former HealthSouth CFO Mike Martin's
guilty plea transcript in which Martin says that he discussed
with you the fact that the numbers contained in the HealthSouth
filing were false and that you told him to inflate the numbers,
to fix the numbers so that they met Wall Street's expectations.
Your response Sunday night was ``I would never have done that.
He is not telling the truth.'' Mr. Scrushy, why do you not tell
us the truth?
Mr. Scrushy. Under the advice of counsel, Mr. Chairman, I
invoke the Fifth Amendment.
Mr. Greenwood. Did you discuss with Mr. Martin the fact
that the numbers contained in HealthSouth's filings were false
and did you direct Martin to inflate the numbers or fix them to
meet Wall Street's expectations?
Mr. Scrushy. I invoke the Fifth, Mr. Chairman.
Mr. Greenwood. Well I am a little confused, Mr. Scrushy. If
what you told the American public Sunday night was in fact the
truth, why don't you simply repeat those denials here today
under oath?
Mr. Scrushy. Mr. Chairman, I have stated my position and my
reason for invoking the Fifth.
Mr. Greenwood. Let us try another one. Mike Wallace asked
you about former CFO McVay's plea transcript in which he said
that you were aware that the financial statement contained
numbers that were incorrect. Your response on Sunday night was
``It is not true.'' That sounds definitive, emphatic. So let me
ask you the same question here today under oath, Mr. Scrushy.
Were you aware that the financial statement contained numbers
that were incorrect?
Mr. Scrushy. As previously stated, Mr. Chairman, I invoke
the Fifth.
Mr. Greenwood. Mr. McVay told the judge you tried to
justify it by saying ``all companies play games with
accounting.'' When Mike Wallace asked you about this on Sunday
night you said ``I never said that to him, and he knows that.''
Mr. Scrushy, did you tell Mr. McVay that ``all companies
play games with accounting''?
Mr. Scrushy. Again, Mr. Chairman, I invoke the Fifth
Amendment.
Mr. Greenwood. Well, since you do not seem to want to
answer Mike Wallace's questions here today under oath, let me
ask a few of my own.
You told ``60 Minutes'' that your CFOs who have plead
guilty had plenty of incentive to falsify the numbers because
of bonuses and stock options, yet is it not true, Mr. Scrushy,
that you were one of the only employees at HealthSouth, if not
the only employee, to have an employment agreement with large
financial bonuses directly tied to monthly and annual revenue
targets? And if you would like to, you could turn to Tab 22 in
the binder in front of you if you would like to refer to that
agreement.
Mr. Scrushy. On advice of counsel, Mr. Chairman, I invoke
my Fifth Amendment rights.
Mr. Greenwood. All right. Well, let us try one last
question. Mike Wallace asked you about your sale of $99 million
worth of HealthSouth stock just before the bad news hit and the
bottom dropped out. Comparing your position to those of average
investors who got taken to the cleaners, he said to you ``But
you got out.'' Your response was ``I did not get--no, I did not
get--I just got some of it out.'' Mr. Wallace replied ``You got
a lot of it out.'' To which you replied ``No.''
Mr. Scrushy, the committee found a copy of an analysis by
HealthSouth's own attorneys showing that you sold off 75
percent of your HealthSouth stock at that time. Was it not just
a bit disingenuous when you told Mike Wallace that you just got
some of it out?
Mr. Scrushy. On advice of counsel, Mr. Chairman, I invoke
the Fifth Amendment rights.
Mr. Greenwood. The Chair yields to Mr. Stearns for the
purpose of questioning.
Mr. Stearns. Thank you, Mr. Chairman.
You have gone, based upon Mike Wallace's interview, you
went and indicated to Mr. Scrushy you want an answer to two or
three of those questions that Mike Wallace posed.
I have a question for you, Mr. Scrushy. Did everything that
you said in that ``60 Minute'' interview with Mike Wallace
represent the whole truth and nothing but the truth?
Mr. Scrushy. Sir, as I said earlier, on advice of counsel I
am going to have to take the Fifth Amendment.
Mr. Stearns. Okay. The last thing you said in that
interview, you said I am an innocent man. I am asking you today
are you an innocent man? Can you say yes without taking the
Fifth?
The question is very simple. Are you an innocent man, yes
or no?
Mr. Scrushy. Mr. Chair--I mean, sir, based on as I said
earlier in my statement and advice of counsel, I stand on my
statement.
Mr. Stearns. I respect that. But I am just saying that you
made a statement you're an innocent man. You have an
opportunity just to answer that question. You do not need to
take the Fifth just to say by gosh I am an innocent man. You
are saying it to yourself, your family and everybody. You are
standing by what you said in your opening statement. So it
seems like you could say yes, I am an innocent man.
Mr. Scrushy. As you know, sir, I--I would love to answer
all of these questions----
Mr. Stearns. It is just----
Mr. Scrushy. And I look forward to the day that I get that
chance. But on advice of counsel during this session I will
take the Fifth Amendment on every question. I will stand on my
statement.
Mr. Stearns. Mr. Chairman, thank you.
Mr. Greenwood. The Chair yields to the gentlelady from
Colorado, Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Scrushy, with all due respect, it seems to me that you
want it both ways. You want to be able to go in front of a
national TV audience and give your story without having to
answer questions under oath. Then you want to come into today
and make a statement, a self-serving statement in my view, and
then when we ask you questions you want to take the Fifth
Amendment when we ask you questions under oath.
And, Mr. Chairman, it seems to me that Mr. Scrushy may well
have waived his right to take the Fifth in front of this
Committee by coming in under oath and making an opening
statement that deals with the substance of the investigation
before answering questions. And so I would respectfully request
the committee to refer this issue to the House General Counsel
for a legal opinion as to whether he has indeed waived his
Fifth Amendment right. And if he has, Mr. Chairman, I would ask
that the committee reserve the right to recall Mr. Scrushy to
answer this committee's questions under oath.
Mr. Greenwood. The Chair will take the gentlelady's request
under consideration.
Mr. Scrushy, let me be clear, are you refusing, as it seems
that you are, to answer all of the questions on the right
against self-incrimination to you under the Fifth Amendment of
the U.S. Constitution?
Mr. Scrushy. Yes, I am.
Mr. Greenwood. Okay. Given that there are no further--and
is it your intention to assert such right in response to all
further questions from the subcommittee today?
Mr. Scrushy. Yes, sir.
Mr. Greenwood. Okay. Given that, if there are no further
questions from the members, I will dismiss you at this time
subject to the right of the subcommittee to recall if
necessary.
Mr. Scrushy, when the day comes that you're prepared to
come to this Committee and testify under oath, have your
lawyers call our lawyers. We would love nothing more than to
give you that opportunity. But, for the moment, sir, you are
excused.
Mr. Scrushy. Yes, sir. We will be happy to do that. Thank
you.
Mr. Greenwood. At this time the Chair will call forward our
second witness, Ms. Susan Jones-Smith, former Senior Vice
President of Finance and Reimbursement of HealthSouth.
Ms. Jones-Smith, please come forward and be seated at the
table. Good morning.
TESTIMONY OF SUSAN JONES-SMITH, FORMER VICE PRESIDENT OF
FINANCE AND REIMBURSEMENT OF HEALTHSOUTH
Ms. Jones-Smith. Hello.
Mr. Greenwood. As you know, when conducting an
investigative hearing, this Committee has the practice of
taking testimony under oath. Do you have any objection to doing
so?
Ms. Jones-Smith. No.
Mr. Greenwood. Okay. In that case, would you stand and
raise your right hand.
[Witness sworn.]
Mr. Greenwood. You can be seated.
Under the rules of the House and this Committee you have
the right to be advised by counsel as to your constitutional
rights. Can you please state for the record the name of the
counsel is here today to advise you with respect to such
matters?
Ms. Jones-Smith. David McKnight.
Mr. Greenwood. That is the gentleman to your right?
Ms. Jones-Smith. Yes.
Mr. Greenwood. Thank you.
The Chair recognizes the witness for purposes of making an
opening statement, if you so desire. Do you desire to make an
opening statement this morning?
Ms. Jones-Smith. I have no opening statement.
Mr. Greenwood. Okay. In that case, the Chair now recognizes
himself for 10 minutes for purposes of questioning the witness,
and I yield 5 minutes to Mr. Walden from Oregon.
Mr. Walden. Thank you, Mr. Chairman.
Ms. Jones-Smith, the SEC has alleged that every quarter for
a period of at least 5 years senior officers at HealthSouth
would meet to discuss how to ``fill the gap'' between
HealthSouth's actual revenues and Wall Street's expected
earnings of the company. My question is did you participate in
or have knowledge about these meetings in which HealthSouth
officers determined how they were going to falsify
HealthSouth's earnings?
Ms. Jones-Smith. Upon advice of counsel, I respectfully
decline to answer based on my Fifth Amendment privilege.
Mr. Walden. Ms. Jones-Smith, let me be clear. Are you
refusing to answer the question on the right against self-
incrimination afforded to you under the Fifth Amendment of the
U.S. Constitution?
Ms. Jones-Smith. Upon advice of counsel, I respectfully
decline to answer based upon my Fifth Amendment rights.
Mr. Walden. And is it your intention to assert such right
in response to all further questions from the subcommittee
today?
Ms. Jones-Smith. Yes, sir.
Mr. Walden. Given that, Mr. Chairman, I would recommend
that this subcommittee dismiss this witness at this time.
Mr. Greenwood. If there are no further questions from the
members, I will dismiss you at this time subject to the right
of the subcommittee to recall you if necessary. And we thank
you for being with us this morning.
You are excused.
The Chair calls forward our next panel of witnesses. And
they are, Ms. Diana Henze, Assistant Controller, HealthSouth
Corporation; Ms. Teresa Sanders, former Group Vice President
and Chief Auditing Officer of HealthSouth Corporation; Mr.
Steve Schlatter, former HealthSouth Physical Therapist; Mr.
Michael Vines, former HealthSouth employee in Corporate Fixed
Assets Department; Mr. Martin Cohen, Senior Managing Director,
FTI Consulting; Ms. Kelly Cullison, former Vice President of
Compliance HealthSouth Corporation; Mr. Greg Smith, Chief
Auditing Officer of HealthSouth Corporation.
Good morning, ladies and gentlemen, and we thank you very
much for volunteering to come and testify at our hearing this
morning.
As you heard me say to the previous witnesses, it is the
practice of this subcommittee to take testimony under oath. And
so I need to ask you if any of you object to giving your
testimony under oath? Okay.
And I also should advise you that pursuant to the rules of
the House and this Committee you are entitled to be represented
by counsel. Do any of you wish to be represented by counsel
this morning?
Yes, sir, Mr. Cohen? You need to bring the microphone up to
you and make sure that it is on. Push the button. There you go.
Mr. Cohen. Represented by Phillip Evans.
Mr. Greenwood. Okay. And he's the gentleman directly behind
you?
Mr. Cohen. Yes, sir.
Mr. Greenwood. Anyone else chose to be represented by
counsel? Ms. Cullison?
Ms. Cullison. Yes. John Robbins is seated behind me.
Mr. Greenwood. Yes. Thank you.
Mr. Smith?
Mr. Smith. Mr. Michael Dyer.
Mr. Greenwood. Okay. Very well.
Ms. Henze? You have got to push the button.
Ms. Henze. Mr. John Robbins sitting behind me.
Mr. Greenwood. Very well. Thank you.
Ms. Sanders?
Ms. Sanders. Mr. John Robbins sitting behind me.
Mr. Greenwood. Okay. And where is Mr. John Robbins. Oh. You
have a busy day today.
All right. In that case, I am going to ask you if you would
please rise and raise your right hand.
[Witnesses sworn.]
Mr. Greenwood. Okay. So saying you are all under oath.
And the Chair would now recognize Ms. Henze first for your
opening statement. And so if you will pull the microphone over
so you can speak directly into it.
Mr. Greenwood. Good morning, ma'am.
Ms. Henze. Good morning.
Mr. Greenwood. Thank you for being with us. And you are
free to make your statement.
TESTIMONY OF DIANA HENZE, ASSISTANT CONTROLLER, HEALTHSOUTH
CORPORATION; TERESA SANDERS, FORMER GROUP VICE PRESIDENT AND
CHIEF AUDITING OFFICER, HEALTHSOUTH CORPORATION; STEVE
SCHLATTER, FORMER HEALTHSOUTH PHYSICAL THERAPIST; MICHAEL
VINES, FORMER HEALTHSOUTH EMPLOYEE IN CORPORATE FIXED ASSETS
DEPARTMENT; MARTIN COHEN, SENIOR MANAGING DIRECTOR, FTI
CONSULTING; KELLY CULLISON, FORMER VICE PRESIDENT OF COMPLIANCE
HEALTHSOUTH CORPORATION; AND GREG SMITH, CHIEF AUDITING
OFFICER, HEALTHSOUTH CORPORATION
Ms. Henze. My name is Diana Henze, and I live in
Birmingham, Alabama.
I am 39 years old, married with two children. I graduated
from the University of Montevallo in 1985 with a B.S. degree in
accounting.
After a few accounting positions, I began working for a
Birmingham-based healthcare company, ReLife, in 1994. In
December of that year, ReLife was acquired by HealthSouth, and
I began working in HealthSouth's accounting department. In 1995
and 1996, I helped install a standardized accounting software
package for the accounting department. In 1997, I was promoted
to Assistant Vice President of Finance, and in 1998, I was
promoted to Vice President of Finance.
My responsibilities were somewhat ad hoc, but included
running the accounting computer system, preparing quarterly
consolidations and assisting in the SEC filings.
Sometime in 1998, after re-running several consolidation
processes for one quarter end, I noticed that earnings and
earnings per share jumped up. The amount and timing of those
changes seemed odd to me so I approached my supervisor, Ken
Livesay, who was the Assistant Controller. Ken told me that the
increase in earnings was the result of the reversal of some
over-reserves and over-accruals. At the time, Ken's explanation
appeared to be reasonable and I did not pursue the matter
further. I did notice a jump in earnings the next quarter, but
I did not question Ken about it.
In January 1999, I went on maternity leave to have my
second son, Douglas, and did not work on the year-end
consolidation or the 10-K preparation for 1998. Shortly after
returning to work in March, I assisted in preparing the first
quarter consolidation and 10Q preparation for 1999. During that
process, I noticed the numbers changing again, and I approached
Ken Livesay a second time. I told him, ``You can't tell me that
we have enough reserves to reverse that would justify this type
of swing in the numbers.'' When he told me that I was right, I
informed him that I did not understand what was going on, but
would have no part in any wrong-doing.
Ken apparently went to Bill Owens, the Controller, with my
suspicions because Bill called me in an attempt to justify what
they were doing. Bill said that HealthSouth had to make its
numbers or innocent people would lose their jobs and the
company would suffer. I told Bill that I believed that whatever
was going on to be fraudulent, and I would not participate in
it and wanted no part of it. I also asked him to stop whatever
it was they were doing and told him that I was going to keep an
eye on it.
The numbers continued to change in the second and third
quarter of 1999. After the third quarter, I went to Ken and
said ``enough is enough,'' because the numbers still appeared
to be moving with irregularities. I told him I was to going to
report these suspicions to our Compliance Department because I
suspected that fraud was being committed within the accounting
department. Ken said to do what I needed to do.
In October or November 1999, I went to our Corporate
Compliance Department and made an official complaint to Kelly
Cullison, who was Vice President of Corporate Compliance. I
gave her information on my suspicions and where I thought some
of the ``entries'' were being made. I also gave her information
on how to write specific types of queries against the
transactional tables within our system, which helped her look
at the fluctuations that were being made and of which I was
suspicious. I did not have access to the supporting
documentation of the suspect journal entries, and therefore,
could not give her that information. As it turns out, Kelly did
not have access to the information necessary to investigate my
complaint of suspected fraud.
Ken Livesay called me to ask if I had gone to the Corporate
Compliance Department with my complaint because he had been
called to Mike Martin's, who was the Chief Financial Officer
office about it. I confirmed that I had gone to the Compliance
department and filed a complaint. In a follow-up discussion
with Kelly Cullison, I told her that I stood by my complaint
and would not withdraw it. I do not mean to imply in any way
that Kelly tried to get me to withdraw my complaint because she
did not do that.
Shortly after I filed the complaint, Ken Livesay was moved
to the position of Chief Information Officer, and two others
were promoted to his previous position of Assistant Controller.
I felt that I had been overlooked for this position and I
confronted Bill Owens about this. I was told by Bill that he
could not put me in that position, because I would not do what
``they wanted me to do.'' Within a few days, possibly weeks, I
requested a transfer from the accounting department and was
transferred immediately to our Information Technology Group.
Soon after joining ITG, I began working on an Internet project
and ultimately moved to that department under the supervision
of Scott Stone in January 2001. Under HealthSouth's new
leadership, in May 2003, I was promoted to Assistant Controller
of the Corporate Division. I enjoy my work now, and believe
HealthSouth is a good company which can be a profitable
business if run properly.
[The prepared statement of Diana Henze follows:]
Prepared Statement of Diana Henze, Assistant Controller, HealthSouth
Corporation
My name is Diana Henze, and I live in Birmingham, Alabama. I am 39
years old, married with two children. I graduated from the University
of Montevallo in 1985 with a B.S. degree in accounting. After a few
accounting positions, I began working for a Birmingham-based healthcare
company, ReLife, in 1994. In December of that year, ReLife was acquired
by HealthSouth, and I began working in HealthSouth's accounting
department. In 1995 and 1996, I helped install a standardized
accounting software package for the accounting department. In 1997, I
was promoted to Assistant Vice President of Finance, and in 1998, I was
promoted to Vice President of Finance. My responsibilities were
somewhat ad hoc, but included running the accounting computer system,
preparing quarterly consolidations and assisting in the SEC filings.
Sometime in 1998, after re-running several consolidation processes
for one quarter end, I noticed that earnings and earnings per share
jumped up. The amount and timing of those changes seemed odd to me so I
approached my supervisor, Ken Livesay, who was the Assistant
Controller. Ken told me that the increase in earnings was the result of
the reversal of some over-reserves and over-accruals. At the time,
Ken's explanation appeared to be reasonable and I did not pursue the
matter further. I did notice a jump in earnings the next quarter, but I
did not question Ken about it.
In January of 1999, I went on maternity leave to have my second
son, Douglas, and did not work on the year-end consolidation or the 10-
K preparation for 1998. Shortly after returning to work in March, I
assisted in preparing the first quarter consolidation and 10Q
preparation for 1999. During that process, I noticed the numbers
changing again, and I approached Ken Livesay a second time. I told him,
``You can't tell me that we have enough reserves to reverse that would
justify this type of swing in the numbers.'' When he told me that I was
right, I informed him that I did not understand what was going on, but
would have no part in any wrong-doing.
Ken apparently went to Bill Owens, the Controller, with my
suspicions because Bill called me in an attempt to justify what they
were doing. Bill said that HealthSouth had to make its numbers or
innocent people would lose their jobs and the company would suffer. I
told Bill that I believed that whatever was going on to be fraudulent,
and I would not participate in it and wanted no part of it. I also
asked him to stop whatever it was they were doing and told him that I
was going to keep an eye on it.
The numbers continued to change in the second and third quarter of
1999. After the third quarter, I went to Ken and said ``enough is
enough,'' because the numbers still appeared to be moving with
irregularities. I told him I was to going to report these suspicions to
our Compliance Department because I suspected that fraud was being
committed within the accounting department. Ken said to do what I
needed to do.
In October or November of 1999, I went to our Corporate Compliance
Department and made an official complaint to Kelly Cullison, who was
Vice President of Corporate Compliance. I gave her information on my
suspicions and where I thought some of the ``entries'' were being made.
I also gave her information on how to write specific types of queries
against the transactional tables within our system, which helped her
look at the fluctuations that were being made and of which I was
suspicious. I did not have access to the supporting documentation of
the suspect journal entries, and therefore, could not give her that
information. As it turns out, Kelly did not have access to the
information necessary to investigate my complaint of suspected fraud.
Ken Livesay called me to ask if I had gone to the Compliance
Department with my complaint because he had been called to Mike
Martin's (Chief Financial Officer) office about it. I confirmed that I
had gone to the Compliance department and filed a complaint. In a
follow-up discussion with Kelly Cullison, I told her that I stood by my
complaint and would not withdraw it. I do not mean to imply in any way
that Kelly tried to get me to withdraw my complaint because she did not
do that.
Shortly after I filed the complaint, Ken Livesay was moved to the
position of Chief Information Officer (CIO), and two others were
promoted to his previous position of Assistant controller. I felt that
I had been overlooked for this position and I confronted Bill Owens
about this. I was told by Bill that he could not put me in that
position, because I would not do what ``they wanted me to do.''
Within a few days or weeks I requested a transfer from the
accounting department and was transferred immediately to our ITG
(Information Technology Group) Department. Soon after joining ITG, I
began working on an internet project and ultimately moved to that
department under the supervision of Scott Stone in January 2001. Under
HealthSouth's new leadership, in May of 2003, I was promoted to
Assistant Controller of the Corporate Division. I enjoy my work now,
and believe HealthSouth is a good company which can be a profitable
business if run properly.
Mr. Greenwood. Thank you, Ms. Henze, and that is a point
that is important for us to understand, that there is new
management at the company and, frankly, wish the new management
well in reestablishing the company.
Ms. Sanders, you are recognized for your opening statement.
Good morning.
Ms. Sanders. Good morning.
TESTIMONY OF TERESA SANDERS
Ms. Sanders. My name is Teresa Sanders, and I currently
live in Birmingham, Alabama. I am 39 years old and I am
married.
In 1986, I graduated from the University of Alabama with a
degree in accounting and also received my master's degree in
accounting in 1988.
I began working with Ernst & Young in August 1988 as a
staff auditor, and I was laid off in February 1990. In March
1990, I was hired by HealthSouth as the Internal Auditor.
During my employment I received three promotions, and when I
left my title was Group Vice President and Chief Auditing
Officer. My immediate supervisor was Richard Scrushy, and I
reported directly to him for over 9 years. I left HealthSouth
in November 1999.
I was hired by HealthSouth to audit our field operations.
When I started at HealthSouth, the company had 35 facilities,
and by the time I left that number had grown to approximately
2000. I had complete access to the financial books of the field
operations in order to do my audits. However, I did not have
access to the corporate financial books. I did not need access
to the corporate books to perform field audits. Ernst & Young
performed the audit on the corporate books and any reports to
the SEC.
As part of my duties as the Chief Auditing Officer, I had
to make reports to the audit committee of the Board of
Directors. All meetings that I had with the audit committee
were before the full Board except for one time in the years
between 1997 and 1998, when I met separately with that audit
committee. However, that meeting was attended by Tony Tanner,
who is an Executive Vice President and Corporate Compliance
Officer.
In 1996, Richard Scrushy approached me about establishing a
50 point checklist which became known as the ``Pristine
Audit.'' After Mr. Scrushy asked me to develop the checklist, I
sent him a memo expressing my opinion about the checklist. I
have attached a copy of that memo. Mr. Scrushy did not
appreciate my opinion on the matter and again instructed me to
develop the checklist for his approval. Mr Scrushy informed me
the Pristine Audit was to be handled by Ernst & Young.
I developed the 50 point checklist which Mr. Scrushy
approved. I am attaching a copy of that checklist as well. As
you can see, the Pristine Checklist has nothing to do with the
auditing of the financial books of a field facility. The
Pristine Audit was nothing more than a cosmetic, white glove,
walk through of a facility. It was in the nature of quality
control and had nothing to do with the financial viability of a
particular facility.
By the time I left HealthSouth, I was having problems with
Mike Martin, who was then CEFO. He turned off my computer
access to the general ledgers of the field operations. I needed
access to those ledgers to do my audits. I had to manually
retrieve hard copies of those ledgers, if needed, which was
very time consuming.
I also did not like the way that HealthSouth handled an
internal sexual harassment investigation. It was my opinion
that the offending employee should have been terminated.
Although I heard rumors that ``they were playing with the
books,'' I had no knowledge that anyone at HealthSouth was
committing fraud.
I ultimately left HealthSouth because I received a better
job offer with Eastern Health Systems in the compliance
department as the Compliance Officer. I was tired of traveling
and my new job did not require any travel.
[The prepared statement of Teresa Sanders follows:]
Prepared Statement of Teresa Sanders, Former Group Vice President and
Chief Auditing Officer, HealthSouth Corporation
My name is Teresa Sanders, and I currently live in Birmingham,
Alabama. I am 39 years old. In 1986, I graduated from the University of
Alabama with a degree in accounting. I received my masters degree in
accounting in 1988.
I began working with Ernst & Young in August of 1988 as a staff
auditor, and I was laid off in February of 1990. In March of that year
(1990), I was hired by HealthSouth as the Internal Auditor. During my
employment I received three promotions, and when I left my title became
Group Vice President and Chief Auditing Officer. My immediate
supervisor was Richard Scrushy, and I reported directly to him for over
nine years. I left HealthSouth in November of 1999.
I was hired by HealthSouth to audit our field operations. When I
started at HealthSouth, the company had thirty-five (35) field
facilities, and by the time I left the number had grown to
approximately two thousand (2000). I had complete access to the
financial books of the field operations in order to do my audits.
However, I did not have access to the corporate financial books. I did
not need access to the corporate books to perform field audits. Ernst &
Young performed the audit on the corporate books and any reports to the
SEC.
As part of my duties as the Chief Auditing Officer, I had to make
reports to the audit committee of the Board of Directors. All the
meetings that I had with the audit committee were before the full Board
except one time in either 1997 or 1998, when I met separately with the
audit committee. However, that meeting was attended by Tony Tanner.
In 1996, Richard Scrushy approached me about establishing a fifty
(50) point checklist which became known as the ``Pristine Audit.''
After Mr. Scrushy asked me to develop the checklist, I sent him a memo
expressing my opinion about the checklist. I have attached a copy of my
memo. Mr. Scrushy did not appreciate my opinion on the matter and again
instructed me to develop the checklist for his approval. Mr Scrushy
informed me the Pristine Audit was to be handled by Ernst & Young.
I developed the fifty (50) point checklist which Mr. Scrushy
approved. I am attaching a copy of the checklist. As you can see, the
Pristine Checklist has nothing to do with auditing the financial books
of a field facility. The Pristine Audit was nothing more than a
cosmetic, white glove, walk through of a facility. It was in the nature
of quality control and had nothing to do with the financial viability
of a particular facility.
By the time I left HealthSouth, I was having problems with Mike
Martin. He turned off my computer access to the general ledgers of the
field operations. I needed access to those ledgers to do my audits. I
had to manually retrieve hard copies of those ledgers, if needed, which
was very time consuming. I also did not like the way that HealthSouth
handled an internal sexual harassment investigation. It was my opinion
that the offending employee should have been terminated. Although I
heard rumors that ``they were playing with the books,'' I had no
knowledge that anyone at HealthSouth was committing fraud. I ultimately
left HealthSouth because I received a better job offer with Eastern
Health Services Systems in the compliance department as the Compliance
Officer. I was tired of traveling and my new job did not require any
travel.
Mr. Greenwood. Thank you, Ms. Sanders. Thank you for being
here.
Mr. Schlatter, your opening statement, please?
TESTIMONY OF STEVE SCHLATTER
Mr. Schlatter. My name is Steve Schlatter. I am a physical
therapist from Muncie, Indiana. I come before this Committee to
present concerns that arose during my employment as an
Administrator of a HealthSouth outpatient clinic from July 1995
to December 2001.
In April 2001, I became aware of an HCFA Transmittal 1828
which discussed the use of the CPT code 97150 group therapy.
The Transmittal states that this code must be used when a
therapist performs ``procedures with two or more individuals
concurrently or during the same time period.'' My concerns
about this were twofold as this was a common practice within
the HealthSouth system and the fact that HealthSouth's HCAP
system (an automated documentation system) did not make this
billing code available for the clinicians to use. Out of
concerns for my professional staff and myself, I felt a
corporate explanation regarding this issue would assure us that
we were in compliance with all regulations and we were in fact
treating ethically and within the accepted standards of our
profession.
My initial effort was a simple request from HealthSouth for
a written policy. My quest for this information proved to be
long, frustrating, and unsuccessful. I did discuss this issue
with the American Physical Therapy Association Department of
Government Affairs and received the same interpretation of the
Transmittal. I also discussed this issue with a colleague who
had hired an independent firm to perform a Medicare compliance
audit on his private physical therapy practice. He claimed his
auditors were adamant that group therapy charges must be used
when treating more than one patient at a time. I communicated
this information to HealthSouth management and saved all
communication to use as proof that I was attempting to comply
with regulations in the event of an unexpected Medicare audit.
After nearly 2 months, I was told by several colleagues
that HealthSouth personnel in the Columbus, Ohio business
office were irritated with my persistence in this matter. At
that time I simply made appropriate internal adjustments within
my own clinic to make sure that we were not treating patients
concurrently, which I felt to be the most ethical and
professionally accepted standard of practice.
In August 2002, I read that HealthSouth was claiming to
miss earnings expectations by $175 million due to unexpected
changes in Medicare reimbursements from group therapy. At that
time I felt compelled to share my information with the
appropriate authorities, thus bringing me before your Committee
today.
I would like to thank you for the opportunity to appear
before this subcommittee, and I am willing to answer any
questions.
[The prepared statement of Steve Schlatter follows:]
Prepared Statement of Steve Schlatter
Mr. Chairman and Members of the Subcommittee: My name is Steve
Schlatter. I am a physical therapist from Muncie, Indiana. I come
before this Committee to present concerns that arose during my
employment as an Administrator of a Healthsouth outpatient clinic from
July 1995 to December 2001. In April of 2001, I became aware of an HCFA
transmittal 1828 which discussed the use of CPT code 97150 group
therapy. The transmittal states that this code must be used when a
therapist performs ``procedures with two or more individuals
concurrently or during the same time period.'' My concerns about this
were twofold as this was a common practice within the Healthsouth
system and the fact that Healthsouth's HCAP system (an automated
documentation system) did not make this billing code available for
clinicians to use. Out of concerns for my professional staff and
myself, I felt a corporate explanation regarding this issue would
assure us that we were in compliance with all regulations and we were
in fact treating ethically and within the accepted standards of our
profession.
My initial effort was a simple request from Healthsouth for a
written policy. My quest for this information proved to be long,
frustrating, and unsuccessful. I did discuss this issue with the
American Physical Therapy Association Department of Government Affairs
and received the same interpretation of the transmittal. I also
discussed this issue with a colleague who had hired an independent firm
to perform a Medicare compliance audit on his private physical therapy
practice. He claimed his auditors were adamant that group therapy
charges must be used when treating more than one patient at a time. I
communicated this information to Healthsouth management and saved all
communication to use as proof that I was attempting to comply with
regulations in the event of an unexpected Medicare audit.
After nearly two months, I was told by several colleagues that
Healthsouth personnel in the Columbus, Ohio business office were
irritated with my persistence in this matter. At that time I simply
made appropriate internal adjustments within my own clinic to make sure
that we were not treating patients concurrently, which I felt to be the
most ethical and professionally accepted standard of practice.
In August of 2002, I read that Healthsouth was claiming to miss
earnings expectations by 175 million dollars due to unexpected changes
in Medicare reimbursements from group therapy. At that time I felt
compelled to share my information with the appropriate authorities,
thus bringing me before your Committee today.
I would like to thank you for the opportunity to appear before this
Subcommittee. I am willing to answer any questions regarding my
statement and testimony.
Mr. Greenwood. We thank you, Mr. Schlatter. Thank you so
much.
Mr. Vines, an opening statement, please?
Mr. Vines. Good morning.
Mr. Greenwood. Good morning, sir.
TESTIMONY OF MICHAEL VINES
Mr. Vines. My name is Michael Vines. I live in Birmingham,
Alabama. I was employed at HealthSouth from April 1997 to May
2002 working in the Fixed Asset Management Department, and
would answer any questions about that time.
Thank you.
Mr. Greenwood. Okay. And we will have plenty of them. Thank
you for being with us.
Mr. Cohen, do you have an opening statement?
TESTIMONY OF MARTIN COHEN
Mr. Cohen. Yes. Mr. Chairman and members of the
subcommittee, good morning. My name is Martin Cohen. I am
currently a Senior Managing Director with FTI Consulting
focusing on financial restructuring of troubled companies.
I have been invited to testify this morning about an
analysis that FTI conducted in the fall of 2002 for
HealthSouth.
In mid-September 2002, FTI was hired by the law firm of
Fulbright & Jaworski to conduct an analysis of the impact of
Medicare Transmittal 1753 on the revenues of HealthSouth. It is
my understanding that Fulbright had been engaged by the Board
of Directors of HealthSouth to examine a number of issues, and
Fulbright hired FTI to examine the impact of Transmittal 1753
on HealthSouth's outpatient rehabilitation revenues and assess
the reasonableness of the HealthSouth's assertion that the
reduction in revenue could, on an annual basis, approximate
$175 million.
While typically FTI considers itself bound by attorney/
client privilege and attorney work product doctrine when it
undertakes investigations at the direction of counsel, it is my
understanding that current counsel for HealthSouth has waived
any such claim of privilege as to the investigation conducted
by FTI, thus allowing me to testify before you today.
After being retained by Fulbright, I led a team of FTI
employees in analyzing the potential impact of Transmittal 1753
on HealthSouth's outpatient rehabilitation revenues. FTI
collected detailed coding and billing information from
HealthSouth's billing files for a limited number of health care
facilities for a 2-week period during the months of May and
June, 2002.
FTI then created a billing model based upon various
assumptions as to how Medicare outpatient rehabilitation coding
guidelines should be applied in the field. FTI further assessed
the potential impact of Transmittal 1753 on commercial and
worker's compensation insurance revenues.
Applying the data provided by HealthSouth to the billing
model developed by FTI, we next applied those conclusions to
HealthSouth's outpatient rehabilitation patient population for
the first 6 months of 2002. Using this methodology, we came up
with a series of estimates of the potential impact of
Transmittal 1753 on HealthSouth's revenues.
FTI presented a draft report to Fulbright on November 5,
2002, which preliminarily indicated that the potential
annualized impact of Transmittal 1753 on HealthSouth's
outpatient rehabilitation revenues from Medicare, commercial
and worker's compensation could range from a low of $101
million to a high of $227 million. The range of impact was
largely dependent on the fact that it was unclear how the
commercial and workers compensation insurers would respond to
the Medicare changes, either through a change in billing
practice or subsequent reduction in rates. However, during the
course of drafting the report FTI staff listened to the
HealthSouth third quarter investor call held on November 5,
2002, and noted significant discrepancies between management's
representations as to the impact of Transmittal 1753 on third
quarter financial results and FTI's preliminary findings.
Concerned that the HealthSouth management's representations
during the third quarter investor call, if correct, could
indicate a problem with FTI's draft analysis, FTI immediately
notified Fulbright & Jaworski of the discrepancies.
Further, on November 6, 2002, I wrote to Bill Owens,
HealthSouth's President and Chief Executive Officer, and
requested that HealthSouth provide FTI with certain specific
financial information, which could be used to check the
discrepancies between FTI's draft findings and the statements
made during the earnings announcement. Neither Mr. Owens, nor
anyone else from HealthSouth, ever responded to my November 6,
2002 request for further information, and FTI never finalized
its report.
I will be happy to answer any questions the members of the
subcommittee may have regarding the draft report.
[The prepared statement of Martin Cohen follows:]
Prepared Statement of Martin L. Cohen, FTI Consulting, Inc.
Mr. Chairman and members of the Subcommittee, good morning. My name
is Martin Cohen. I am currently a Senior Managing Director with FTI
Consulting, Inc. (``FTI''), focusing on financial restructuring of
troubled companies. I have been invited to testify this morning about
an analysis that FTI conducted in the Fall of 2002 for HealthSouth
Corporation (``HealthSouth'').
In mid-September, 2002, FTI was hired by the law firm of Fulbright
& Jaworski (``Fulbright'') to conduct an analysis of the impact of
Medicare Transmittal 1753 (``Transmittal 1753'') on the revenues of
HealthSouth. It is my understanding that Fulbright had been engaged by
the Board of Directors of HealthSouth to examine a number of issues,
and Fulbright hired FTI to examine the impact of Transmittal 1753 on
the HealthSouth's outpatient rehabilitation revenues and assess the
reasonableness of the HealthSouth's assertion that the reduction in
revenue could, on an annual basis, approximate $175 million. While
typically FTI considers itself bound by the attorney-client privilege
and attorney work product doctrine when it undertakes investigations at
the direction of counsel, it is my understanding that current counsel
for HealthSouth has waived any such claim of privilege as to the
investigation conducted by FTI, thus allowing me to testify before you
today.
After being retained by Fulbright, I led a team of FTI employees in
analyzing the potential impact of Transmittal 1753 on HealthSouth's
outpatient rehabilitation revenues. FTI collected detailed coding and
billing information from HealthSouth's billing files for a limited
number of health care facilities for a two-week period during the
months of May and June, 2002. FTI then created a billing model based
upon various assumptions as to how Medicare outpatient rehabilitation
coding guidelines should be applied in the field. FTI further assessed
the potential impact of Transmittal 1753 on commercial and worker's
compensation insurance revenues. Applying the data provided by
HealthSouth to the billing model developed by FTI, we next applied
those conclusions to HealthSouth's outpatient rehabilitation patient
population for the first six months of 2002. Using this methodology, we
came up with a series of estimates of the potential impact of
Transmittal 1753 on HealthSouth's revenues.
FTI presented a draft report to Fulbright on November 5, 2002,
which preliminarily indicated that the potential annualized impact of
Transmittal 1753 on HealthSouth's outpatient rehabilitation revenues
from Medicare, commercial and workers compensation could range from a
low of $101 million to a high of $227 million. The range of impact was
largely dependent on the fact that it was unclear how the commercial
and workers compensation insurers would respond to the Medicare
changes, either through a change in billing practices or subsequent
reduction in rates. However, during the course of drafting the report
FTI staff listened to the HealthSouth third quarter investor call held
on November 5, 2002, and noted significant discrepancies between
management's representations as to the impact of Transmittal 1753 on
third quarter financial results and FTI's preliminary findings.
Concerned that the HealthSouth management's representations during
the third quarter investor call, if correct, could indicate a problem
with FTI's draft analysis, FTI immediately notified Fulbright &
Jaworski of the discrepancies. Further, on November 6, 2002, I wrote to
Bill Owens, HealthSouth's President and Chief Executive Officer, and
requested that HealthSouth provide FTI with certain specific financial
information, which could be used to check the discrepancies between
FTI's draft findings and the statements made during the earnings
announcement. Neither Mr. Owens, nor anyone else from HealthSouth, ever
responded to my November 6, 2002 request for further information, and
FTI never finalized its report.
I will be happy to answer any questions the members of the
Subcommittee may have as to the draft analysis performed by FTI.
Mr. Greenwood. Thank you very much, Mr. Cohen.
Ms. Cullison, do you have an opening statement.
Ms. Cullison. Yes.
Mr. Greenwood. Good morning.
TESTIMONY OF KELLY CULLISON
Ms. Cullison. Good morning.
My name is Kelly Cullison, and I live in Birmingham,
Alabama. I am 32 years old. I graduated from the University of
Alabama at Birmingham with a degree in accounting in December
1992.
In August 1994, I was hired by HealthSouth to work in the
Internal Audit Department. I held the title of Staff Auditor,
Senior Auditor and Assistant Vice President of Internal Audit.
In June 1997, I was transferred to the compliance department
and was given the title of Compliance Director.
The Compliance Department provided an internal mechanism
for the employees to report problems. We ran a day-to-day
hotline and most of the complaints that we received involved
personnel problems. Those complaints were routed to the Human
Resource Department.
My immediate supervisor was Tony Tanner who was Executive
Vice President of Administration. Mr. Tanner retired in
December 1999, and he was replaced by Brad Hale who was my
immediate supervisor until I resigned in January 2001.
Around November 1999, Diana Henze came to me with a
complaint about some accounting transactions. This was a face-
to-face meeting with Diana, and she gave specific information
about journal entries being posted on a quarterly basis. She
gave me specific queries to run on the computer system to find
the journal entries. In short, Diana's complaint had to do with
possible fraud being committed. I ran the queries and found
large dollar amounts being entered. However, I did not have
access to the supporting documents to determine whether or not
the journal entries were legitimate. Therefore, I did not have
the means or authority to properly investigate Diana's
complaint.
I took Diana's complaint to my supervisor Tony Tanner. He
expressed concern and said that he would look into the matter.
I believe that I had a follow-up conversation with Diana about
her complaint, but I do not recall the specifics of what was
said. However, Diana was clear that she stood by her complaint
and would not withdraw it. Mr. Tanner told me that Diana's
complaint had been resolved and that the case was closed. I had
no reason to doubt him because I could not investigate her
complaint on my own. Because of the way HealthSouth was
structured a complaint such as Diana's had to go up the chain
of command to be properly investigated.
I left HealthSouth in January 2001 to begin working for
myself. I started my own business doing internal audits for
healthcare companies on an independent contract basis.
At HealthSouth, the Compliance Department was defined too
broadly. It dealt not only with State and Federal laws and
regulations but also with internal policy as well. The
department was bogged down with complaints concerning internal
policy and personnel decisions, and it simply became a
clearinghouse of complaints. As I stated earlier, most
complaints were sent to Human Resources. We did not have the
authority or resources to investigate complaints such as the
one brought by Diana. What we should learn from this is that
the compliance departments should have the appropriate
resources and authority, such as complete access to corporate
books to investigate complaints involving fraud in financial
accounting.
Moreover, compliance departments should consider the merits
of focusing solely on State and Federal laws and regulations
rather than broadly addressing regulatory and personnel issues.
Thank you.
[The prepared statement of Kelly Cullison follows:]
Prepared Statement of Kelly Cullison, Compliance Director, HealthSouth
Corporation
My name is Kelly Cullison, and I live in Birmingham, Alabama. I am
thirty-two years old. I graduated from the University of Alabama at
Birmingham with a degree in accounting in December of 1992.
In August of 1994, I was hired by HealthSouth to work in the
Internal Audit Department. I held the title of Staff Auditor, Senior
Auditor and Assistant Vice President of Internal Audit. In June of
1997, I was transferred to the compliance department and was given the
title of Compliance Director.
The Compliance Department provided an internal mechanism for the
employees to report problems. We ran a day-to-day hotline and most of
the complaints that we received involved personnel problems. Those
complaints were routed to the Human Resource Department.
My immediate supervisor was Tony Tanner who was Executive Vice
President of Administration. Mr. Tanner retired in December of 1999,
and he was replaced by Brad Hale who was my immediate supervisor until
I resigned in January of 2001.
Around November of 1999, Diana Henze came to me with a complaint
about some accounting transactions. This was a face-to-face meeting
with Diana, and she gave specific information about journal entries
being posted on a quarterly basis. She gave me specific queries to run
on the computer system to find the journal entries. In short, Diana's
complaint had to do with possible fraud being committed. I ran the
queries and found large dollar amounts being entered. However, I did
not have access to the supporting documents to determine whether or not
the journal entries were legitimate. Therefore, I did not have the
means or authority to properly investigate Diana's complaint.
I took Diana's complaint to my supervisor Tony Tanner. He expressed
concern and said that he would look into the matter. I believe that I
had a follow-up conversation with Diana about her complaint, but I do
not recall the specifics of what was said. However, Diana was clear
that she stood by her complaint and would not withdraw it. Mr. Tanner
told me that Diana's complaint had been resolved and that the case was
closed. I had no reason to doubt him because I could not investigate
her complaint on my own. Because of the way HealthSouth was structured
a complaint such as Diana's had to go up the chain of command to be
properly investigated. In retrospect, it appears that the ``foxes were
guarding the chickens.''
I left HealthSouth in January of 2001 to begin working for myself.
I started my own business doing internal audits for healthcare
companies on an independent contract basis.
At HealthSouth, the Compliance Department was defined too broadly.
It dealt not only with State and federal laws and regulations but also
with internal policy as well. The department was bogged down with
complaints concerning internal policy and personnel decisions, and it
simply became a clearinghouse of complaints. As I stated earlier, most
complaints were sent to Human Resources. We did not have the authority
or resources to investigate complaints such as one brought by Diana.
What we should learn from this is that compliance departments should
have the appropriate resources and authority, i.e. complete access to
corporate books to investigate complaints involving fraud in financial
accounting. Moreover, compliance departments should consider the merits
of focusing solely on State and federal laws and regulations rather
than broadly addressing regulatory and personnel issues.
Mr. Greenwood. Thank you, Ms. Cullison.
Mr. Smith, for your opening statement.
TESTIMONY OF GREG SMITH
Mr. Smith. I do not wish to make a statement at this time,
but I will answer your questions.
Mr. Greenwood. Very well. Thank you very much.
The Chair recognizes himself for 10 minutes for purposes of
inquiry, and we will begin with you, Ms. Henze.
Ms. Henze, you told us in your opening statement that in
1998 you began to notice earnings and earnings per share, as
you said, jump up over a period of a few days during the
quarter end consolidation process. Could you explain to us what
you were asked to do that caused you to notice the changes in
the numbers?
Ms. Henze. Yes. One of my sole responsibilities or one of
my responsibilities was to run the consolidation process, which
is to pull the numbers together after general accounting was
through.
So when general accounting came to me and said they were
through, I pulled--you know, I ran a consolidation process,
which is a totally audited process on the computer, handed it
up to my supervisor, which was Ken Livesay.
Shortly there afterwards, they asked me to rerun it. Open
up the periods--well, actually, I'm sorry. They asked me to
open up the accounting periods so that more entries could be
entered into the system.
Mr. Greenwood. And was that in itself unusual?
Ms. Henze. Not in and of itself. I mean, usually you can
run a consolidation and then be asked to rerun.
Mr. Greenwood. Okay.
Ms. Henze. But this was probably like the third, maybe the
fourth time. I mean, it was continuing to do that. And at this
time of the quarter end it was very unusual that your amounts
should jump dramatically or drastically.
So it was just in this process that after a few times of
running the consolidation that the numbers--that the numbers
jumped.
Mr. Greenwood. Okay. You told our staff that you also
witnessed accounting meetings occurring behind closed doors.
Could you tell us who you recall in those meetings and what
appeared to be happened or what happened after those meetings?
Ms. Henze. Yes. Usually during the quarter end prior to
earnings releases during--after I had run the consolidations,
one, twice, there would be a meeting in a conference room right
outside of Mr. Owens' office. And----
Mr. Greenwood. And just identify who Mr. Owens is.
Ms. Henze. I'm sorry. Mr. Owens was the Controller at that
time.
Mr. Greenwood. Okay.
Ms. Henze. Shortly after this meeting after they would
adjourn, I would get a phone call to open up the accounting
periods that they needed to make some additional entries, which
in my previous answer I would go through that whole process
again.
Mr. Greenwood. Right. Okay. And was Mr. Livesay there?
Ms. Henze. Yes.
Mr. Greenwood. And Weston Smith?
Ms. Henze. I believe I recall seeing Mr. Smith.
Mr. Greenwood. Susan Jones?
Ms. Henze. Yes.
Mr. Greenwood. Sharon Faulkner?
Ms. Henze. Yes.
Mr. Greenwood. Emery Harris?
Ms. Henze. Yes, sir.
Mr. Greenwood. Kay Morgan?
Ms. Henze. Yes, sir.
Mr. Greenwood. Okay. These are pretty senior level officers
that are meeting, and then soon after you are told to reopen
the consolidation process and, lo and behold, the numbers are
changing. Is that what you are testifying to?
Ms. Henze. That is--that is correct.
Mr. Greenwood. Okay. You mentioned that in 1999 you were
called into Bill Owens' office after you complained to your
boss about your suspensions of fraud. Did Mr. Owens or Mr.
Livesay, your boss, ever deny that the fraud was being
committed?
Ms. Henze. They neither denied nor acknowledged.
Mr. Greenwood. They didn't admit it, they didn't deny it,
they just sort of nodded their heads, is that what they did?
Okay.
You told our staff in an interview that when you were
called into Bill Owens' office in 1999 after you told your boss
Ken Livesay's your suspicions about fraud, that Mr. Owens said
``If we do not meet our earnings, people start losing jobs.''
Is that what the Controller of HealthSouth told you?
Ms. Henze. Yes, sir.
Mr. Greenwood. Were you shocked?
Ms. Henze. Pretty much.
Mr. Greenwood. Did you take that as an admission that they
were doing something funny with the numbers?
Ms. Henze. He did not deny it, so it was kind of I really
did not know whether to really believe that they were or that
somebody----
Mr. Greenwood. How did you feel emotionally about that?
Ms. Henze. I was pretty upset.
Mr. Greenwood. You also Committee staff that you spoke to
Mike Martin, who was then the CFO of HealthSouth about your
concerns. Could you tell us what you told Mr. Martin and what
his response was?
Ms. Henze. I went to Mike Martin, it was mainly about being
passed over for a promotion. And----
Mr. Greenwood. Did you believe that you were being passed
over because you had brought these concerns?
Ms. Henze. I did not know what to believe at first.
Mr. Greenwood. Okay.
Ms. Henze. But I was told that I did not get the promotion
because I did not--would not participate. But in our
conversation I brought up the--what had been occurring within
the accounting department. Mike seemed very upset, but restated
some similar to Bill's conversation that----
Mr. Greenwood. Was he yelling?
Ms. Henze. He was yelling, not necessarily at me. More of
just that he was approached with an uncomfortable situation.
Mr. Greenwood. Did he say the company will go down, we have
to do it?
Ms. Henze. I believe he--he said something that we have to
do this. I am not sure if he actually said the company will go
down.
Mr. Greenwood. Okay. And then Mr. Scrushy walked into Mr.
Martin's office?
Ms. Henze. Yes, right near the end of our conversation.
Mr. Greenwood. Okay. Did Ken Livesay ever relay to you that
he had been told by upper management to ``passive you''.
Ms. Henze. Mr. Livesay had called me into his office
shortly after I had gone to the Corporate Compliance. And had
asked me if I actually did go in and file a complaint. He
apparently--he had told me that he got called to Bill--I mean,
to Mike Martin's office and that eventually they wanted
Compliance to come back to the person who had filed the
complaint and instruct them to go back to Mr. Livesay so that
he could smooth things over.
Mr. Greenwood. When you spoke with Kelly Cullison about
your suspensions of accounting fraud, did you also mention to
her who you believed might be involved?
Ms. Henze. Yes, sir.
Mr. Greenwood. Did you mention Ken Livesay, Mike Martin,
Bill Owens?
Ms. Henze. Yes, sir.
Mr. Greenwood. Okay. The people that you believed were
committing accounting fraud as far back as 1998, have these
people plead guilty to similar charges?
Ms. Henze. Yes, sir.
Mr. Greenwood. Okay. What did you believe would happen when
you made your formal complaint with HealthSouth Compliance
Department?
Ms. Henze. I believed that it--that it would go up to
senior--the most senior level and that appropriate action would
take place, and that the--if it was fraud, which is what I
suspected, that it would be addressed and taken care of.
Mr. Greenwood. And do you in fact think now looking back
that it was taken seriously and it was investigated?
Ms. Henze. I think when I made--I believe when I made my
complaint to the--to Kelly in Corporate Compliance that it was
taken seriously. I do not think that it was taken seriously or
handled appropriately beyond that.
Mr. Greenwood. What made you decide to go to log a formal
complaint with the Compliance Department?
Ms. Henze. What made me?
Mr. Greenwood. When did you decide it was time to file a
formal complaint?
Ms. Henze. When it became apparent that it was going to
continue even after my first address to Mr. Owens and Mr.
Livesay.
Mr. Greenwood. It is a pretty bold thing to do. Were you
not worried about losing your job?
Ms. Henze. I was not really worried about losing my job.
Mr. Greenwood. Because you did not think you would lose it
or because you could survive without it?
Ms. Henze. Well, I could not really--it would have been
tough to survive without it. You know, technically they could
not fired me for going to Compliance, even though I know that
they could have made it very hard for me.
Mr. Greenwood. Yes. Or pass----
Ms. Henze. But it was not right. So----
Mr. Greenwood. Well, good for you.
Ms. Henze. Thank you.
Mr. Greenwood. Let me quickly try to ask a question or two
of Ms. Sanders.
Now you told us you worked for HealthSouth from 1993 to
2000 and you were the Chief Internal Auditor for the company
throughout many of those years. To whom did you report to in
that capacity?
Ms. Sanders. Actually, I worked for the company 1990 to
1999.
Mr. Greenwood. Okay.
Ms. Sanders. And I reported to Richard Scrushy, the CEO.
And when I started, he was also the President of the company as
well.
Mr. Greenwood. Okay. Did the internal audit department have
any direct reporting relationship with the audit committee of
the board of directors?
Ms. Sanders. In the charter, I believe there was a
statement that they would have a reporting--maybe not a direct
reporting relationship, but a reporting relationship to the
audit committee.
Mr. Greenwood. That is the way it was supposed to work?
Ms. Sanders. That was the way it was supposed to work. But
in reality I did not have separate meetings with the audit
committee except for that one that was in 1990--somewhere
between----
Mr. Greenwood. And why was that? You know at the time that
the charter said that there was supposed to be this reporting
relationship?
Ms. Sanders. Correct.
Mr. Greenwood. You did not take it upon yourself to make
that happen or you tried and were not given the opportunity, or
what?
Ms. Sanders. It was really--I mean, it was a very difficult
thing to try to push that with Mr. Scrushy. He was--he did not
like surprises. He wanted to be in those meetings. So those why
those meetings were usually held always with the----
Mr. Greenwood. So did you ever ask Mr. Scrushy if it would
be okay if you reported directly to the----
Ms. Sanders. I do not recall ever asking him for that
specifically, no.
Mr. Greenwood. In the 10 years that you were Chief Internal
Auditor for HealthSouth how many times did you meet with the
audit committee?
Ms. Sanders. One time, and that--I mean, as far as like one
time separately. Whenever we had audit committee meetings, they
were always the full board. They--that meeting was the one that
was attended by Tony Tanner, who was the Executive Vice
President and Compliance Officer.
Mr. Greenwood. Were you scared that Mr. Scrushy would find
out that you made--I'm sorry.
Let me go back to you, Ms. Henze. And one final question
for you because my time has expired. Were you scared that Mr.
Scrushy would find out that you made the allegations?
Ms. Sanders. That I made----
Mr. Greenwood. No. This is Ms. Henze, I'm sorry. I'm sorry.
Ms. Henze. I'm sorry, what was your question?
Mr. Greenwood. I asked you earlier if you were worried
about losing your job. Were you particularly worried that Mr.
Scrushy would find out about this?
Ms. Henze. Yes, sir.
Mr. Greenwood. Okay. Why were you worried that he would
find out about this?
Ms. Henze. I was worried about retaliation.
Mr. Greenwood. What made you worried about retaliation? Was
there reason?
Ms. Henze. Just the atmosphere and rumors that circulate
within the corporation.
Mr. Greenwood. Such as?
Ms. Henze. That he did not like bad news. That, you know,
just bad things happened. And, you know, one of the examples is
definitely you would lose your job, but is it more than just
intimidation? I did not know, you know, financially, personally
there would be a retaliation toward me.
Mr. Greenwood. Okay. Thank you.
My time has expired. The gentlelady from Colorado.
Ms. DeGette. Thank you, Mr. Chairman.
Ms. Henze, were you worried as well as your job about your
husband's job?
Ms. Henze. Yes, ma'am.
Ms. DeGette. And why was that?
Ms. Henze. My husband works for the University of Alabama
in Birmingham, and Mr. Scrushy has a lot of contact there with
the University.
Ms. DeGette. And were you worried that he would have the
influence to effect your husband's job if he was upset with
you?
Ms. Henze. Yes, ma'am. Yes, ma'am.
Ms. DeGette. Why is it that you thought that Mr. Scrushy
would go that far in retaliation? What gave you that level of
fear?
Ms. Henze. I cannot really give you a specific. It was more
of just the general atmosphere within the corporate office that
you are not to do anything to cross Mr. Scrushy.
Ms. DeGette. Did you get the sense with your position that
Mr. Scrushy kept an eye on the books and knew what was going on
in terms of the financial affairs of the company?
Ms. Henze. Did I think that he knew what was going on or--
--
Ms. DeGette. Yes.
Ms. Henze. Yes, ma'am.
Ms. DeGette. Why?
Ms. Henze. Well, in the Monday morning meetings that we
would have, he talked about just the numbers of the books and
that he made comments ``I know what's going on, I am keeping an
eye on everybody's performance.'' I mean, you know, mainly
talking about the operational, facility operations. So he--he--
he stressed it within our Monday morning meetings.
Ms. DeGette. Now, you were here in the hearing room when we
played the snippets from the ``60 Minutes'' interview with Mr.
Scrushy, were you not?
Ms. Henze. Yes, ma'am.
Ms. DeGette. I thought I saw you. And I do not know if you
heard Mike Wallace say you don't keep track of the accounting.
Mr. Scrushy said ``CEOs do not do that. CFOs do that.'' Do you
remember seeing that?
Ms. Henze. Yes, ma'am.
Ms. DeGette. In your experience in your position do you
think that that is true that Mr. Scrushy didn't keep track of
the accounting?
Ms. Henze. I--I believe that kept an eye on the performance
of the company, maybe not down to the total details of the
accounting. But he kept an eye on what our earnings were, what
our performance was.
Ms. DeGette. And I think that is the job of the CEO, do
you?
Ms. Henze. Yes, ma'am.
Ms. DeGette. Ms. Sanders, I wanted to ask you because you
reported directly to Mr. Scrushy what you thought about that
statement. Was it your sense that Mr. Scrushy kept track of the
accounting, at least on a general basis?
Ms. Sanders. On a general basis, yes. He--during those
Monday morning meetings that Ms. Henze's referring to, yes, he
would make those--those comments.
Ms. DeGette. Talk if you can a little bit your perception
of those Monday morning meetings?
Ms. Sanders. They were usually very large, especially
toward the end when I was there because there several hundred--
or several hundred people within the room. You were basically
to report on the top five things that you did the previous week
and the top five things that you were going to be reporting on
this on the upcoming week.
Usually he followed up with ending comments and would talk
about, you know, he usually had a stack that he would throw up
on the table and say that I have got all the numbers for the--
for every one of the facilities and I am watching, and I know
what is going on in this facilities.
Ms. DeGette. So, as the internal auditor you--was that your
title, internal auditor?
Ms. Sanders. That was my title when I started with the
company in 1990, yes.
Ms. DeGette. Okay. And, I'm sorry, when you left it was
Group Vice President and Chief Auditing Officer.
Ms. Sanders. Yes.
Ms. DeGette. So it was your job in the Monday morning
meetings or the Monday meetings to talk about the auditing,
right?
Ms. Sanders. It basically the facilities that we were
visiting and that we had been at last--at the previous week and
then the facilities that we were visiting for the coming week.
We did not necessarily report on the results of those audits.
Ms. DeGette. Now, you did not actually have access to the
corporate books when you were doing field audits, did you?
Ms. Sanders. No, I did not.
Ms. DeGette. Did you ever have access to the corporate
books?
Ms. Sanders. No, I did not.
Ms. DeGette. How is it as the Group Vice President and
Chief Auditing Officer you would be able to achieve field
audits if you could not compare it back to the corporate books?
Ms. Sanders. That was not part of our audits. We were to
audit the information that was coming in from the individual
facilities, and to just make sure it had been posted correctly
to the general ledgers. But it was not our responsibility to
make sure that it got pulled into the corporate books or into
the consolidation.
Ms. DeGette. And whose job was that?
Ms. Sanders. That would have been left to Ernst & Young to
audit that.
Ms. DeGette. The outside auditors?
Ms. Sanders. The outside--the outside auditors, yes.
Ms. DeGette. And you said in your testimony that you had
some concerns, I think it was in 1996, and so you wrote a memo
to Mr. Scrushy about the facility auditing. That is Tab 40 in
the notebook in front of you there.
Ms. Sanders. Is this the Pristine, referring to the memo
about the Pristine Audit?
Ms. DeGette. Right.
Ms. Sanders. Yes, ma'am.
Ms. DeGette. Why did you write that memo to Mr. Scrushy?
Ms. Sanders. I do not have a copy of it, but I believe I
remember it.
Ms. DeGette. It is the one that you said was attached to
your testimony.
Ms. Sanders. Thank you.
Ms. DeGette. It says to Richard M. Scrushy from----
Ms. Sanders. Yes. Uh-huh.
I wrote it for two reasons. No. 1 was I felt it--not that
it was a waste of money. I agreed with the idea that we needed
to do these types of audits, but I did not necessarily agree
that we needed to have a CPA firm performing those audits.
Ms. DeGette. So the word ``audit'' is being thrown around
kind of loosely here.
Ms. Sanders. Right.
Ms. DeGette. Because, I mean, with you you are an
accountant, right?
Ms. Sanders. Correct. Yes.
Ms. DeGette. So when you do an audit, you are talking about
reconciling the books, correct?
Ms. Sanders. Right. Financially.
Ms. DeGette. But that's not financial information. But that
is not the kind of audit that Mr. Scrushy was talking about,
was it?
Ms. Sanders. No. This was more of a quality standards,
quality control.
Ms. DeGette. And, in fact, the 50 point--the Pristine
factor audit form?
Ms. Sanders. Yes.
Ms. DeGette. That's attached to Tab 41, and that was also
attached to your testimony.
Ms. Sanders. Right.
Ms. DeGette. That was what you were talking about, that was
the kind of audit that Mr. Scrushy wanted of the facilities,
correct?
Ms. Sanders. Correct, yes.
Ms. DeGette. And the kinds of audit is things like: Overall
appearances, organized and neat; music is at an acceptable
level, etc, right?
Ms. Sanders. Correct.
Ms. DeGette. Now none of those are financial things?
Ms. Sanders. No, ma'am.
Ms. DeGette. Now, after you sent this memo to Mr. Scrushy,
did you take that concern to anybody else that they were asking
you to do a facilities type audit but not a financial audit?
What did you do about that?
Ms. Sanders. I--I had cc'd this memo to Jim Bennett, Gerald
Brown, Aaron Beam and Bill Owens. I did not necessarily hear
any responses back from them about this, but that would have
been--this would have been an internal memo and I would not
have gone outside of the company with my concerns about it.
Ms. DeGette. But did anybody ever get back to you and tell
you--let me ask you this----
Ms. Sanders. Which it did, yes.
Ms. DeGette. Did you ever do any financial audits of the
outside facilities, of the facilities?
Ms. Sanders. Yes. That was what we were responsible for,
was doing the financial audits of the field locations, the
information that they were sending in to the corporate office.
Ms. DeGette. Did you ever visit the field locations?
Ms. Sanders. Yes.
Ms. DeGette. How many of the field locations?
Ms. Sanders. When I started, I probably did about 20 of the
35. And then when we left, we usually budgeted for about 100
facilities to be audited in a year.
Ms. DeGette. Now, I think you said that while you were
there--did you want to correct and answer, ma'am?
Ms. Sanders. I'm sorry. I'm sorry. No, ma'am.
Ms. DeGette. After consulting with counsel?
Ms. Sanders. Okay. It was--yes. It was my responsible to do
the financial audits on the field locations.
Ms. DeGette. Right.
Ms. Sanders. Yes. Okay.
Ms. DeGette. Now, you said there were 35 facilities and one
auditor when you started.
Ms. Sanders. Right.
Ms. DeGette. And then when you left there were 1800
facilities, correct?
Ms. Sanders. Correct.
Ms. DeGette. So were there 50 auditors then when you left?
Ms. Sanders. No. There were approximately 10 auditors.
Ms. DeGette. Ten auditors for 1800 facilities?
Ms. Sanders. Correct.
Ms. DeGette. So were you able to then do the same kind of
level of auditing at the end as you were at the beginning?
Ms. Sanders. No.
Ms. DeGette. Obviously.
Ms. Sanders. No.
Ms. DeGette. Did Ernst & Young ever tell you that your
internal audit operation was weak?
Ms. Sanders. No, they did not make that direct statement to
me, no.
Ms. DeGette. Did Ernst & Young ever recommend that you have
access to the corporate books so that you could compare the
audits?
Ms. Sanders. No, ma'am. They did not make that direct
statement.
Ms. DeGette. And did Ernst & Young ever recommend that you
get additional staff to complete these audits?
Ms. Sanders. We talked about adding staff and they tried to
make--they made those recommendations, to my knowledge, to
management. They would make that recommendation, and I am not
sure if it was in the management letter or not, but those would
make those recommendations to management.
Ms. DeGette. And did you ever discuss that with Mr.
Scrushy, your immediate supervisor?
Ms. Sanders. I did talk to him one time about adding more
staff. We did end up adding one or two more people at that
point in time. That was probably the 1996 to 1998 timeframe is
what I am thinking.
Ms. DeGette. And was that sufficient, was that one
additional staff member sufficient to complete these audits?
Ms. Sanders. No. No it was nowhere near. No.
Ms. DeGette. Now, security at HealthSouth was always very
tight. Were there hidden cameras in the hallways?
Ms. Sanders. Yes.
Ms. DeGette. And where were they, do you know?
Ms. Sanders. I know of one in particular. It was outside of
Bill Owens' and Weston Smith's office.
Ms. DeGette. Do you know what those hidden cameras were
for?
Ms. Sanders. To keep an eye on who was going in and out of
the offices, is all I know.
Ms. DeGette. When did you discover that?
Ms. Sanders. During an investigation that I conducted. A
contract employee had falsified and had gotten--falsified
documents and had gotten a check written. And during that
investigation working with the security department they showed
me tapes from those cameras and I realized that there wasn't a
camera that you could see up there. And they said, well, there
is some that are hidden. And they showed me where.
Ms. DeGette. How did that make you feel then?
Ms. Sanders. Oh, a little nervous.
Ms. DeGette. Thank you.
Mr. Greenwood. The time of the gentlelady has expired. The
Chair recognizes the gentleman from Oregon, Mr. Walden for 10
minutes.
Mr. Walden. Thank you, Mr. Chairman.
Ms. Henze, you have testified about the reopening of the
books and the adjustments that occurred I think going into the
end of each quarter, is that correct?
Ms. Henze. Yes, sir.
Mr. Walden. Did the numbers ever get adjusted negatively?
Ms. Henze. Not that I recall. No, sir.
Mr. Walden. So to the best of your recollection the numbers
were always enhanced, which would make it seem like the company
was doing better than perhaps it was?
Ms. Henze. Yes, sir. They were always enhanced to meet the
earnings per share that was estimated on the street.
Mr. Walden. I want to hear that again. They were always
enhanced to meet the earnings per share estimate----
Ms. Henze. The earnings per share.
Mr. Walden. [continuing] that was on the street?
Ms. Henze. Yes.
Mr. Walden. And that is part of why you filed your
objection?
Ms. Henze. Yes, sir.
Mr. Walden. Okay. Ms. Sanders, were minutes ever kept of
the Monday morning meetings?
Ms. Sanders. I am not aware of any minutes that were kept.
I do know that they kept copies of our reports that we
submitted for those meetings.
Mr. Walden. Do you know based on what you know about the
security system, were they tapped?
Ms. Sanders. Not to my knowledge. I do not know. There were
cameras in the conference center, then it would have been
taped. But I am not sure if there are cameras in that
conference center. I do not remember.
Mr. Walden. It would be most interesting to find out.
The memo, Ms. Sanders, that you sent to Mr. Scrushy, could
you describe for us to the best of your recollection his
specific reaction to that memo? Did he ever talk to you about
that?
Ms. Sanders. Oh, yes. Yes, sir, he did. He was very upset
with me. I felt like I was disagreeing with what he was wanting
to do and the program that he was wanting to do. And I was told
to get--I needed to pull the wagon and get with the program and
go out and make it happen. And that is basically what I did.
Mr. Walden. Is that all he said to you?
Ms. Sanders. He was very vocal in how he said it, specific
language that he used I do not recall. But I just know that he
was very forceful in telling me that I needed to put this memo
aside, he wanted this done and we were going to go forward with
this.
Mr. Walden. Did he say that you were lucky to have a job?
Ms. Sanders. Yes, he did. He did tell me that. He said I
needed to remember that I was lucky to have a job. That I had
been laid off from Ernst & Young and that I had not--and I did
not have a job when I had started to work with HealthSouth,
yes.
Mr. Walden. Did he ever call you an idiot?
Ms. Sanders. He did not use that specific terminology, no.
But he--he certainly made me feel that way once I walked out of
there.
Mr. Walden. All right. Who chaired the board's audit
committee?
Ms. Sanders. During the time that I was there it had been
Dr. Philip Watkins.
Mr. Walden. And did you ever meet just individually with
Dr. Watkins?
Ms. Sanders. No, sir. No.
Mr. Walden. Did he ever ask to meet with you individually?
Ms. Sanders. No, sir, he did not.
Mr. Walden. Did he ever schedule board meetings, audit
committee meetings to meet with you?
Ms. Sanders. No, sir, he did not.
Mr. Walden. Was there ever a discussion about why the
internal auditor reported to senior management and not to the
audit committee independently?
Ms. Sanders. Not with me there was not.
Mr. Walden. Did you ever raise that as an issue that maybe
that's not the way it should work?
Ms. Sanders. Not with him, no.
Mr. Walden. Who did you raise it with?
Ms. Sanders. The only person that I would have raised that
with would have been when we were writing the charter when I
first started, and that would have been with Tony Tanner and
with Mr. Scrushy at that time.
Mr. Walden. So Mr. Tanner and Mr. Scrushy? And you raised
it with them, and what again did the charter say?
Ms. Sanders. The charter, when it--one it had been revised
said that I reported directly to the CEO and in his absence the
CFO of the company with I believe, it was either administrative
or functional responsibility to the audit committee of the
board of directors.
Mr. Walden. So we get back to this issue of lack of
internal control. Would you say based on your auditing
experience that there was extraordinary internal control in the
sense that anything you found went directly to the CEO/
President or the CFO, I believe all 5 of whom have now admitted
to fraud?
Ms. Sanders. Yes.
Mr. Walden. Is that not a huge gap in internal controls?
Ms. Sanders. Yes, but our responsibility was only to audit
the field locations. So that information would have gone to the
operations personnel as well as in a general report to Mr.
Scrushy and then to whoever, like the president of the company
which would have been Jim Bennett at that point in time.
So, yes, there would be a gap.
Mr. Walden. Would you work for a company that set it up
that way again?
Ms. Sanders. No, sir, I would not.
Mr. Walden. All right. Thank you.
Mr. Cohen, why did the alleged $175 million hit that
HealthSouth claimed it took in the third quarter of 2002 not
make sense to you?
Mr. Cohen. Actually, they did not claim to have taken a
$175 million in the third quarter. Their representation that
they made, if I remember correctly, was that revenues were
decreased third quarter over second quarter by $23 million
related to Transmittal 1753.
The 175 was their estimate of an annualized effect
including both Medicare and non-Medicare.
The reason it did not make sense is as part of our analysis
we also sampled a period of time the last 2 weeks of September
for the purpose of seeing if indeed they were--the billing
practice had changed and just how far adrift they were from the
guidelines that we felt were appropriate.
When we did that at the time you did the analysis for that
2 week period, the most had they been following those billing
practices throughout that quarter, the most that could have
been effected by Transmittal 1753 we felt were somewhere in the
$7, $7.5 million range.
Mr. Walden. $7 to $7.5 million range?
Mr. Cohen. Right. That would be the most.
We also were aware that for the most part guidance had not
been given throughout the quarter as to changing billing. So
our view was that really the changes in billing were only
taking place starting to take effect the last part of
September. So our initial feeling was that perhaps $2 to $4
million may have been effected during that quarter. Not 23.
Mr. Walden. So did you proceed to find out what accounted
for the other amount of money?
Mr. Cohen. As soon as we saw that, we had just--we heard
this as we were drafting the report. And as soon as we saw it,
we let Fulbright and Jawarksi know that we had some concerns
about it, and that we needed to resolve those before we could
ever make the report final. And then on November 6 I sent a
note to Bill Owens detailing all the representations that were
being made and asked for additional information, and never did
get a response. Contacted him----
Mr. Walden. So----
Mr. Cohen. Tried to contact him about three times and never
did get a response.
Mr. Walden. Never did get a response?
Mr. Cohen. No.
Mr. Walden. So is it your opinion then, was it then and is
now that 1753 would not have had an incredible impact on the
company?
Mr. Cohen. My opinion is that I feel very comfortable very
with the analyses that we did. I cannot tell you, I mean, there
may--we did sampling. You could not go out to all the thousands
of facilities and do this.
Mr. Walden. Sure.
Mr. Cohen. So there is always a potential for error. But I
felt very comfortable with our analyses. And so based on that,
I would--there was virtually no impact on the commercial
insurance during that quarter and the most, as I said, the
Medicare could have possibly been 6, 6.5 and probably was
closer to 2 or 3.
Mr. Walden. Do you think then that Mr. Scrushy was using
Transmittal 1753 as a ruse to cover up other accounting
misstatements that had been made prior to that so you wrap it
all up and blame it on Transmittal 1753, wipe it out, point
over here when really the fraud is over there?
Mr. Cohen. Obviously, at the time we had no knowledge as to
the depths of the fraud that was taking place there. So we were
concerned that perhaps adjustments were being made to
contractual allowances for prior periods that might account for
the difference. In hindsight knowing what I know today, it
certainly would have been methodology of covering up some of
those earnings.
Mr. Walden. Mr. Vines, I read a little bit about your
comments on this issue. And I understand the allegation is
something in the order of more than a billion dollars was
shifted from expenses over into capital costs, right?
Mr. Vines. That is correct.
Mr. Walden. I guess the question that I cannot answer and
maybe you can, is why the auditors did not more closely
question that much capital asset showing up on the books? Now,
I know from what we have read there is this allegation of
manipulation of the data so that anything from up to $4,999,
you know, that Ernst & Young did not look at anything below
$5,000. So those are what, I guess, got picked up and pulled
over and put into assets and amortized over a longer period of
time. Is that accurate?
Mr. Vines. That's correct.
Mr. Walden. I am not an account. So help me out here.
But still there should be some paper trail behind that to
identify a billion plus showing up there. What broke down
there? How was that not identified?
Mr. Vines. I do not know, really. I mean it just moved from
the expense accounts to the capital accounts.
Mr. Walden. But would you not agree that--I mean somebody
in the accounting side of things, the auditing side of things
should have noticed a billion dollars showing up over there, or
is it just----
Mr. Vines. Well, if it is within a dollar range, the
auditors do not look at it. So if it is under $5,000, they are
not going to pay attention to it.
Mr. Walden. Right. But in accumulative when you get a get
to a billion showing up on the balance sheet, do that not
change----
Mr. Vines. Because if they are looking individual, looking
at individual costs instead of overall costs.
Mr. Walden. So there is nobody looking at that? It is
amazing.
Did you ever have contact with the auditors?
Mr. Vines. Not directly. Any contact I had with the
auditors was through Kathy Edwards, my former supervisor.
Mr. Walden. And she has now plead guilty for the fraud?
Mr. Vines. Yes.
Mr. Walden. You raised some of these issues, the allegation
is, on Yahoo?
Mr. Vines. Yes.
Mr. Walden. Are you Junior?
Mr. Vines. Yes.
Mr. Walden. And what were you trying to accomplish there
you could not accomplish inside the company?
Mr. Vines. Well, I started posting messages after I left
HealthSouth. I mean, I just wanted the truth out there of what
was going on at HealthSouth in the accounting department and
how expenses were being shifted and, you know, bogus assets
added to the books each quarter.
Mr. Walden. Let me ask you this, because part of what we
are trying to do is not just investigate what happened to
HealthSouth, but look at are there changes in accounting rules,
laws, things we do here in the Congress would catch these sorts
of problems and save shareholders extraordinary losses. Is
there something we need to change or was this just criminal
behavior already in violation of law?
Mr. Vines. It is already in law. I mean, I am sorry it is
happening. This is you need a tougher compliance department at
the corporations, you know, a monitoring and stronger auditor
department, you know, auditing every entry.
Mr. Walden. What did Kathy Edwards ask you to do with
respect to the capitalization?
Mr. Vines. She had ran some queries on some expense
accounts and she wanted me to move out certain expenses from
$500 to right under $5,000, move those out of the expense
accounts to the capital accounts.
Mr. Walden. And did you object to that?
Mr. Vines. Not really. The only thing I asked for, is I
asked for her signature on the entries after the entries were
prepared.
Mr. Walden. And you did that for what purpose?
Mr. Vines. I was not comfortable with the entries.
Mr. Walden. So you knew this was not a right thing to do?
Mr. Vines. Yes.
Mr. Walden. But you did not--basically the signature gives
you CYA?
Mr. Vines. Yes.
Mr. Walden. That is what you were after. And you--why did
you not come forward like Ms. Henze came forward and file a
complaint within the internal workings? Is it fear, is it----
Mr. Vines. Fear. I was afraid I would lose my job.
Mr. Walden. Thank you, Mr. Chairman. That is all the
questions I have at this time.
Mr. Greenwood. The Chair thanks the gentleman, and
recognizes the gentleman from New Jersey, Mr. Ferguson for 10
minutes.
Mr. Ferguson. Thank you, Mr. Chairman.
I just want to begin by thanking all the witnesses for
being here today. I really believe that you are acting in the
best way that you know how to try and account for this
situation and to try and prevent this kind of a tragedy from
happening again.
I want to begin with Mr. Vines, if I might. Mr. Vines, you
knew people at HealthSouth were making accounting entries that
you were not comfortable with, is that correct?
Mr. Vines. Yes.
Mr. Ferguson. While you were employed at HealthSouth did
you ever personally witness a falsification of a document that
were being given to your auditors, to Ernst & Young? And if you
did, tell us about that.
Mr. Vines. Yes, I did. It was for the 2001 audit, I
believe, at HealthSouth. The auditor while they were
questioning an asset addition, which was an AP summary on a
general ledger, well Kathy Edwards had scanned the accounts
payable system to find a dollar amount close to that amount
that she needed. She then ordered me to get that copy of the
invoice for her. And then she scanned the invoice into her
computer system and made the changes she needed on the invoice
to give to the auditors.
Mr. Ferguson. You had testified in court about a fake asset
in Kansas?
Mr. Vines. Yes.
Mr. Ferguson. Being supported by alerted documentation for
an asset from Massachusetts. And as you were just saying and as
I understand it, people were using scanners and computers to
create false documents and using them to lie to the auditors?
Mr. Vines. That is correct.
Mr. Ferguson. That is correct?
You seem to have discussed these uncomfortable entries with
some of your colleagues. In April you testified that you
discussed this with asset manager supervisors for the other two
regions. Who were those people in the east and in the west?
Mr. Vines. The west was Wendy Walker and the east was on
Amy Watts.
Mr. Ferguson. And you had testified that between the three
of you that you covered all 1800 HealthSouth facilities and
that Amy Watts and Wendy Walker the same kind of thing was
happening in their offices that was happening in yours, is that
right?
Mr. Vines. I believe so.
Mr. Ferguson. And I have got your testimony from a Federal
court here, and I want to ask you some of the questions that
were posed to you then.
There was this fraud hotline within HealthSouth, the 1-800
hotline program with cards that had been passed out to all the
employees to report anything that you were not comfortable
with. Is that right? You are familiar with that?
Mr. Vines. Yes, I am.
Mr. Ferguson. Did you ever call that hotline to report
these frauds, these falsification of documents that were being
given to your auditors?
Mr. Vines. No, I did not.
Mr. Ferguson. Okay. After you talked to Amy Watts and Wendy
Walker about what was going on, did either one of them indicate
that they were going to call the hotline or had called the
hotline?
Mr. Vines. No, they did not. Not to me they did not.
Mr. Ferguson. Did you have any conversations amongst
yourselves suggesting that one another may be--someone call the
hotline?
Mr. Vines. No.
Mr. Ferguson. Did you talk amongst the three of you about
possibly informing your auditors about what was going on, about
going right to Ernst & Young to tell them some of these things
that you were uncomfortable with?
Mr. Vines. No. No, we did not.
Mr. Ferguson. Okay. Thank you.
Mr. Vines. Thank you.
Mr. Ferguson. I want to move on to Ms. Henze.
Ms. Henze, you have testified in Federal court that you
knew that fraud was being perpetrated by some of your superiors
at HealthSouth, is that correct?
Ms. Henze. I suspected fraud was being----
Mr. Ferguson. You suspected so, okay.
And you had said, and you have made clear today that you
did not want to sit idly by while this was going on?
Ms. Henze. Right.
Mr. Ferguson. It was obviously making you uncomfortable and
you have talked about kind of a culture of fear and
intimidation.
I do not have any question. And it is clear from your
testimony today that you were trying to do the right thing, and
I do not question that at all. But looking back, do you ever
wish that you had gone directly to the outside auditors to talk
about what was going on within the company? I mean, you had--
your superiors who you believed or you suspected that they were
committing fraudulent acts and you obviously were involved in
this or a victim of, in many ways, this culture of fear, this
culture of possible retaliation not only against you, but as
you said against your husband. Did you ever think or consider
going to the outside auditors to talk to them about what was
going on?
Ms. Henze. I just used internal purposes.
Mr. Ferguson. Okay. Why? Any idea why? Was it because of
this fear or----
Ms. Henze. Can you repeat the question?
Mr. Ferguson. Sure. We talked about your suspicions of
fraudulent activities that were being done or perpetrated by
your superiors, by the executives. I mean, we have 15 people
who have plead guilty to various sundry things, so I think some
of your fears have been substantiated or your suspicions have
been confirmed. But my question was about going to outside
auditors, your outside auditors Ernst & Young. You know, there
were documents that were being fraudulently constructed and
used to perpetrate this fraud and to mislead your outside
auditors Ernst & Young. And my question was did you ever,
because of your suspicions of what your supervisors were doing,
did you ever think to go to or consider going directly to the
outside auditors to tell them about your suspicions or your
concerns?
Ms. Henze. First of all, I did not know there was the
documentation thing that was going on.
Mr. Ferguson. Okay.
Ms. Henze. No, I--I personally felt that it should--I
should go through the channels that were made available to me,
which was our corporate compliance.
Mr. Ferguson. So you never considered telling someone
outside the company, the external auditors?
Ms. Henze. Yes, I had thought about it. But I chose not to.
Mr. Ferguson. And why is that?
Ms. Henze. Because I felt that it needed to be handled
internally first and then let compliance, which was my avenue
to take this kind of suspicion to and let them handle it with
the appropriate authorities at that time.
Mr. Ferguson. Okay. Thank you very much.
I just have a couple of questions for Ms. Sanders.
You were at HealthSouth from 1990 to 1999, is that right?
Ms. Sanders. Correct.
Mr. Ferguson. Okay. And you were the director of internal
audit?
Ms. Sanders. I started out as the internal auditor. Was
promoted to assistant VP and then to Vice President, and then
Group Vice President.
Mr. Ferguson. Depending on the company, the role of
internal auditor varies, is that right?
Ms. Sanders. Correct.
Mr. Ferguson. And according to your testimony in Federal
court your job description differed from what many would
consider a typical internal auditor, is that correct?
Ms. Sanders. If you--if you were hiring an internal auditor
to be for an entire corporation, then yes my job description
differed.
Mr. Ferguson. Your role it seems based on your testimony in
the past, your role as internal auditor tended to be more
focused on the field operations?
Ms. Sanders. Correct.
Mr. Ferguson. And not on auditing the books at the
corporate level?
Ms. Sanders. Correct.
Mr. Ferguson. Is that correct?
Ms. Sanders. Yes.
Mr. Ferguson. All right. And you suspected fraud?
Ms. Sanders. I didn't suspect fraud. I had heard rumors
about it, but I never had anyone bring me information saying
this is what's happening, let me show you what's going on.
Mr. Ferguson. But you requested access to the books, the
corporate books, is that right?
Ms. Sanders. To the corporate books, yes. It was not
because I suspected fraud, no.
Mr. Ferguson. But your request was denied, is that correct?
Ms. Sanders. Correct.
Mr. Ferguson. How did that make you feel? Was that common?
Did you--was that the response you expected?
Ms. Sanders. Not necessarily that I expected, but I was
told that I was hired to audit the field locations and that is
what Richard wanted me to do. So I didn't----
Mr. Ferguson. Based on the rumors that you had heard and
then being denied an opportunity to review the corporate books,
did you have any suspicions yourself of fraudulent activities?
Did you think there was any merit to these rumors of possible
fraudulent activity?
Ms. Sanders. Since I did not have any documentation to
prove that it was going on, it was strictly a rumor and I could
not necessarily go running up to the executive level with
saying oh, I am hearing all these rumors that are going on. I
needed something more substantial to be able to start an
investigation and to be able to pursue it.
Mr. Ferguson. But you did not have an opportunity to get
anything more substantial because your superiors were denying
you that information?
Ms. Sanders. Correct.
Mr. Ferguson. So did that give you any suspicion, a hunch,
anything at all?
Ms. Sanders. It did not give me the warm fuzzy, if you want
to put it that way.
Mr. Ferguson. Okay. Did you ever share that with your
external auditors?
Ms. Sanders. With the external auditors, no, I did not
share that I did not have access to that. They did understand,
though, that I only audited the field locations just because
they saw what our audits, the list of audits that we did and
then the list of audits that we were either planning to do over
the next year or that we had completed. Because they reviewed
our work at the year end.
Mr. Ferguson. Okay. Thank you.
My time is up. I just want to thank the witnesses for being
here. I want to thank you. I know you are--I really believe
that you were operating on good faith and appreciate your
cooperation here this morning. Appreciate it.
Mr. Greenwood. The Chair thanks the gentleman, and Mr.
Rogers is recognized for 10 minutes.
Mr. Rogers. Thank you, Mr. Chairman.
I appreciate the opportunity to be here, and I appreciate
the witnesses here today. As a former FBI agent, I can tell you
your work and honest testimony is incredibly important to get
to the bottom of this particular set of pretty bad
circumstances. And we thank you for having the courage to do
that.
I have just a few questions, Mr. Chairman.
Mr. Cullison, you were the head of Corporate Compliance, as
I understand it. Is that correct?
Ms. Cullison. I was the Compliance Director. I reported to
the Corporate Compliance officer.
Mr. Rogers. Right. And how would you define your job
responsibilities?
Ms. Cullison. I ran the day-to-day operations of the
compliance department, which included running our employee
hotline, coordinating training for our employees, day-to-day
types of things.
Mr. Rogers. And explain the employee hotline to me, if you
would?
Ms. Cullison. Certainly. The employee hotline was a
mechanism that we put into place for employees to report any
wrongdoing, any questions that they had, concerns that they had
about violations of our internal policies or State or Federal
regulations or laws. And the hotline, it was just that. And
when a case came in, we either routed it to the appropriate
department and if it was not a matter for us to investigate or
we handled the investigation within our department.
Mr. Rogers. So it could be an equal opportunity complaint,
it could be an audit?
Ms. Cullison. Right. It ran the gambit. Everything from
personnel issues, which really amounted to about 75 to 80
percent of our calls, any kind of financial issues. Really
anything that an employee had a question about.
Mr. Rogers. So you would take that information, and how
would you handle it? What would you do with that information
that came off of that employee hotline?
Ms. Cullison. We would log it into a computer system. We
kept track of the date the call was received, if we knew any
information about the general location, the facility or the
state, we would keep track of that information. We lodged the
details of the call and any kind of resolution that was done as
well.
Mr. Rogers. Now you know a person named Diana Henze,
correct?
Ms. Cullison. Yes.
Mr. Rogers. She also worked with HealthSouth as well?
Ms. Cullison. Correct.
Mr. Rogers. That is correct. Is it true that Ms. Henze
reported to you that there was fraud at the company in relation
to inflated earnings?
Ms. Cullison. She reported that she had some suspicions
about accounting transactions that she had seen.
Mr. Rogers. And how did you dispose of that information?
Ms. Cullison. When she came and talked to me, she gave me
tips on what types of queries to run on our accounting system,
what types of journal entries to look for. So I ran those
queries and was able to confirm the types of journal entries
that she had concerns about did exist.
From that point forward I did not have the authority or the
means to investigate it any further. I did not have access to
the supporting documentation for those journal entries, so I
took it to my supervisor, Tony Tanner, and he told me that he
was concerned about it and that he would look into it.
Mr. Rogers. Did you tell anyone else in the company about
this report?
Ms. Cullison. Not that I recall.
Mr. Rogers. Were you ever told not to talk to your external
auditing company?
Ms. Cullison. No.
Mr. Rogers. Okay. Did you ever have any feeling that that
might be something you should do?
Ms. Cullison. No. I felt like I had taken it through the
proper channels by taking it to my supervisor.
Mr. Rogers. Did you ever hear through your supervisor or
did you ever directly talk to Mr. Scrushy that this report had
been made and that he had acknowledged the receipt of it either
by your supervisor; ever have that conversation anytime in your
employment?
Ms. Cullison. Did I have knowledge that Mr. Scrushy was
aware of it?
Mr. Rogers. Yes.
Ms. Cullison. No.
Mr. Rogers. What did you your supervisor tell you he had
done with that information?
Ms. Cullison. He did not give me details of his
investigation. He merely told me that he had looked into it and
that the allegations were unsubstantiated.
Mr. Rogers. Did you believe that to be true at the time?
Ms. Cullison. I had no reason not to believe that.
Mr. Rogers. Did you ever go to the audit committee of the
board of directors?
Ms. Cullison. No, I did not have reporting authority to
them.
Mr. Rogers. Did you ever directly have communication with
Ernst & Young about either the complaint or the inconsistencies
that you saw, or your report to your supervisor?
Ms. Cullison. No.
Mr. Rogers. None of those things happened?
Ms. Cullison. No.
Mr. Rogers. Now, did you at anytime subsequently to this
have a conversation with Ms. Henze as to what happened with
that information?
Ms. Cullison. We had a follow up conversation or two after
her initial report to me. I do not remember the details of
that. She continued to make it clear that that she stood by her
complaint.
Mr. Rogers. Did you give her any advice that she may want
to seek someone else's advice at that particular time, by any
chance?
Ms. Cullison. I do not recall giving her that type of
advice.
Mr. Rogers. Okay. Do you have any idea what kind of
direction you may have offered her at that time?
Ms. Cullison. I do not recall. I am sorry.
Mr. Rogers. Did you see after that time any increase in the
number of calls to the hotline about audit irregularities?
Ms. Cullison. No.
Mr. Rogers. Nothing?
Ms. Cullison. No.
Mr. Rogers. Again, I appreciate your honesty in being here.
And I have to tell you how important it is that you are here so
that we make sure this does not happen in the future.
And, Mr. Chairman, I am going to yield back the balance of
my time.
Mr. Greenwood. The Chair thanks the gentleman, and would
make two notes. Oh, we will go to Mr. Stearns next.
We anticipate votes within the next 15 minutes, but we also
intend to do a second round of this panel.
The gentleman from Florida, Mr. Stearns, is recognized for
10 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
In the time I have I thought I would talk to Mr. Schlatter.
He, from what we have heard in the witnesses and the panel this
morning, Mr. Chairman, seems like he was a person with a
conscience, an individual that was asking questions and sort of
like in our past hearings here we have had people which we call
whistleblower, but he might not be a strict sense a
whistleblower, but he was an individual that had conscience and
was asking some questions. And I understand you are a physical
therapist who used to work in HealthSouth facility?
Mr. Schlatter. Yes, sir.
Mr. Stearns. From July 1995 through December 2001. And, as
I understand it from your opening statement, you started
questioning some of the billing practice for group therapy.
Now, under Medicare reimbursement, if you are reimbursed
for group therapy, that is less than for one-on-one, is that
correct?
Mr. Schlatter. Way less, yes.
Mr. Stearns. Way less.
And you attempt a corporate policy on this issue. And what
was the reaction to your corporate policy?
Mr. Schlatter. I never received one. My initial email was
to a gentleman who was involved with the HCAP system, and he
responded that there was a policy. But over the next----
Mr. Stearns. So you asked him? Can I see the----
Mr. Schlatter. Yes. Yes.
Mr. Stearns. Okay.
Mr. Schlatter. Yes. However, over the next 2 months this
policy was never able to be produced.
Mr. Stearns. And this policy was to include whether it is
group therapy for reimbursement versus one-on-one?
Mr. Schlatter. I understood that, yes, there was just no
way for us document in our HCAP system that we were doing group
therapy. And in essence, we were doing that. We just could not
document that we were doing that. We were continuing to bill as
one-on-one.
Mr. Stearns. So you did a lot of group therapy?
Mr. Schlatter. Yes, sir.
Mr. Stearns. And you were billing it, you were told to bill
it as one-on-one?
Mr. Schlatter. That is the only way we could.
Mr. Stearns. Okay. And how long did this go on?
Mr. Schlatter. This--the Transmittal was actually dated
1996. Our profession as a whole was unaware of this
transmittal. I myself was made aware of it in April 2001 from a
weekly publication of the ELI Rehab Report. Upon receiving that
report, I sought information in put from HealthSouth and I also
called our American Physical Therapy Association for their
interpretation. And I spoke with a personal friend, colleague,
who had just recently gone through an voluntary Medicare audit
of his own private practice to discuss these issues.
Mr. Stearns. How many physical therapists like yourself do
you think approximately were working for HealthSouth doing the
same type of thing that you were doing; that is billing for
individual therapy when you were doing group therapy?
Mr. Schlatter. Hundreds.
Mr. Stearns. Hundreds? And so this went from 1996 to the
year 2001?
Mr. Schlatter. Correct.
Mr. Stearns. So we compound what you were very disturbed
about by hundreds of employees, two or three hundred maybe,
maybe a thousand? Do you think we are talking about----
Mr. Schlatter. Oh, thousands, yes.
Mr. Stearns. Thousands. So let us move from the word
``hundreds'' to thousands of employees doing physical therapy
and they're doing it in group and they are billing it as one-
on-one because there is no corporate policy, is that correct?
Mr. Schlatter. There was no way in our billing system to
bill for group therapy.
Mr. Stearns. Okay. So there must be at some point, based
upon you emailing and asking for corporate policy and reading
in the literature that it was wrong and knowing innately that
this is wrong, this must have troubled our conscience?
Mr. Schlatter. Very much. That is why I was persistent in
trying to get some resolution.
Mr. Stearns. And did you ever get a resolution to your
concern?
Mr. Schlatter. No, sir.
Mr. Stearns. Okay. So in the roughly 6 years you were there
you never got any support from above saying look, we will give
you a corporate policy on this?
Mr. Schlatter. We--I did not actually start asking about
the policy until I was made aware of it in April 2001.
Mr. Stearns. 2001?
Mr. Schlatter. Yes.
Mr. Stearns. Okay. Did you ever go to anybody else, for
example to the Corporate Compliance Department?
Mr. Schlatter. No, I did not.
Mr. Stearns. Okay. Did you never know there was a Corporate
Compliance Department?
Mr. Schlatter. I was aware of it. I had a supervisor quite
candidly tell me that I did not want to go there, they would
make my life miserable.
Mr. Stearns. So you got threatened? You got intimidated?
Mr. Schlatter. Yes.
Mr. Stearns. And were you intimidated or intimidated maybe
is a lighter word than threatened, intimidated over the whole
period or was this just sporadically or was this consistent, or
how would you say that pressure was put on you? Over what
period of time and how often? Monthly, weekly, yearly?
Mr. Schlatter. No, I would not say intimidated. I mean----
Mr. Stearns. Harassed? Harassed not the right word either.
Mr. Schlatter. Pressured.
Mr. Stearns. Pressured. Pressured. Yes. Okay.
So with this letter pressure you thought well, who am I? I
am a physical therapist. I am working in the chain of command
here and the people at HealthSouth said there is no corporate
policy, because they have not answered my question and there is
thousands of my colleagues billing improperly. Is there a check
off box that you had to actually say whether it was group
therapy or individual?
Mr. Schlatter. No. No.
Mr. Stearns. Okay. So you just submit the hours and the
costs to HealthSouth and they would submit it to Medicare?
Mr. Schlatter. No. We did all of our documentation, our
clinical procedures on a laptop, okay. And the--the program--it
was programmed, okay. And it was programmed to base our billing
based on what we entered in that we had done. What procedures
we had done. What exercises we had done. We therapy modalities
we had done. And our billing statement was just generated from
what we had entered.
Mr. Stearns. Okay. So this would be then given to? To whom
was it given?
Mr. Schlatter. It went via computer to Birmingham.
Mr. Stearns. To Birmingham. And in Birmingham just run
through my mind, what do you think happened there? I mean, did
they just take your hours and then submit to to Medicare as
individual therapy?
Mr. Schlatter. Yes.
Mr. Stearns. And how did you know they were doing that?
Mr. Schlatter. Well, I mean, I knew it was being billed
one-on-one because the group therapy was not--again, it was not
on the billing statement.
Mr. Stearns. Oh. So you only had one box?
Mr. Schlatter. Again, that was all taken right off the
software of the computer.
Mr. Stearns. Okay. I see.
Mr. Schlatter. I did not, per se, check group, one-on-one.
Mr. Stearns. Did HealthSouth develop that software?
Mr. Schlatter. Yes.
Mr. Stearns. Okay. And it was not done by an outside
source?
Mr. Schlatter. No.
Mr. Stearns. So that did HealthSouth say we had no
culpability because we did not develop that software? It was
done in house?
Mr. Schlatter. Right.
Mr. Stearns. And did they update this on a regular basis?
Did you get any revisions to that software?
Mr. Schlatter. I had just started working with the HCAP
system a couple of months prior to my realization that this was
a problem. We--I mean, I think--I think the HCAP was just
rolled out in my facility in February 2001.
Mr. Stearns. I got you.
Now, you said in your opening statement that you tried to
make internal adjustments at your clinic when you could not get
resolution to this corporate issue of group therapy.
Mr. Schlatter. Yes.
Mr. Stearns. Maybe just give us briefly what sort of
adjustments you are talking about?
Mr. Schlatter. I just simply altered the schedule books so
that we would never see two patients at one time. We would not
double book like we had done in the past. And, I mean, that
pretty much took care of it for my clinic. You know, I faced
some ramifications from decreased revenues, but----
Mr. Stearns. Did you share your protocol that you developed
at your facility with other physical therapists?
Mr. Schlatter. Yes.
Mr. Stearns. And what was the response of these other
people?
Mr. Schlatter. Actually, I shared it with some of the
management people via conference call and I was told that I
would face the repercussions of decreased earnings.
Mr. Stearns. So they reduce your salary?
Mr. Schlatter. No. No. That was not threatened.
Mr. Stearns. What was the threat when you say ``decreased
earnings?'' Is that universally or----
Mr. Schlatter. When I did not meet my budget. You know, the
budget was the thing, you know, that administrators had to be
concerned about.
Mr. Stearns. But you talked about a group therapy
reimbursement versus individual.
Mr. Schlatter. My bottom would have been effected.
Mr. Stearns. Bottom line. So what would that mean, what
were they saying to you if you did not meet your figures?
Mr. Schlatter. That I would just have to face the
consequences.
Mr. Stearns. And what were the consequences in your mind?
Were they going to fire you?
Mr. Schlatter. There were other circumstances involved, but
my facility was closed.
Mr. Stearns. They would close your facility?
Mr. Schlatter. Yes, it was closed.
Mr. Stearns. It was eventually closed?
Mr. Schlatter. Yes.
Mr. Stearns. Okay.
Mr. Schlatter. And I should add, there were other
circumstances involved.
Mr. Stearns. You do not want to share those with us? Are
they too intimate? You do not have to, now. You have done a
great job.
Mr. Schlatter. No, I will. The majority of my business was
based on workman's compensation.
Mr. Stearns. Okay.
Mr. Schlatter. We had two HealthSouth industrial medicine
clinics within my hometown. That was the majority of my
referrals. HealthSouth sold those facilities to U.S.
Healthworks, who brought their own therapists in and, thus,
that took away my referral base area.
Mr. Stearns. Okay.
Mr. Chairman, I yield back the 1 second I have.
Mr. Greenwood. Sure you do not want to use that, Mr.
Stearns?
Mr. Stearns. No, thank you.
Mr. Greenwood. The Chair notes that, you know, we have just
begun a series of votes on the House floor. So that will
consume probably a half an hour by the time we get to them. So
I am going to recess until 1 o'clock so members will have an
opportunity and the witnesses and the audience, as well, have
an opportunity to get some lunch. And perhaps some of the staff
members might inform the witnesses where they can find lunch
over the course of the hour.
So we will reconvene at 1 o'clock.
[Whereupon, at 11:58 a.m., the subcommittee recessed, to
reconvene at 1:09 p.m., the same day.]
Mr. Greenwood. The committee will come to order.
We thank the patience of the witnesses. We hope that they
found a place to have a sandwich and are refreshed.
The Chair recognizes himself for 10 minutes for inquiry,
and Mr. Vines, I would like to begin with you.
Under questioning from Mr. Ferguson, he asked you a series
a questions about why you did not report what you were
suspicious of to the company sooner. Do you believe that the
hotline could have been bugged and is that why you did not
report what was going wrong with the accounting?
Mr. Vines. I was afraid I would lose my job if I went to
the Compliance Department.
Mr. Greenwood. Okay. But I thought you may have told staff
that you were not sure that the hotline was monitored, that
somehow you would not have anonymity if you used the hotline?
Is that the case?
Mr. Vines. That is true. That is true.
Mr. Greenwood. Did you have any reason to believe that?
Were there rumors to that effect in the company?
Mr. Vines. Just rumors and just a feeling.
Mr. Greenwood. Okay. All right.
Let me to go to Ms. Cullison. Okay. I am sorry. I am not
going to Ms. Cullison. I am going to Ms. Sanders.
Okay. If you turn to Tab 67 in your notebook there, you
will find what's popularly will be called the ``Fleeced
Shareholder Email.'' Do you recall being provided this document
by Bill Horton or anyone else at HealthSouth around November
1998? This was, apparently, a memo or an email that was sent
anonymously from someone who had called himself or herself a
fleeced shareholder. Went to a long list of folks at Ernst &
Young and at HCFA and at the SEC, and it relayed concerns about
the bookkeeping at HealthSouth. Have you seen this in that
timeframe?
Ms. Sanders. I do not recall seeing this memo. I do recall
having a discussion with Bill Owens to generate a response to
one of the things in the memo.
Mr. Greenwood. And that was what timeframe? Back around
late 1998?
Ms. Sanders. Yes.
Mr. Greenwood. So you were aware of this? Did he----
Ms. Sanders. I do not recall him going into detail as to
why I needed to write the memo and the response.
Mr. Greenwood. Okay.
Ms. Sanders. I do not remember seeing this.
Mr. Greenwood. Okay. Is it fair to say you probably would
have remembered a memo that said from a ``fleeced
shareholder''?
Ms. Sanders. Yes. Yes. I believe I would.
Mr. Greenwood. Have you previously had a chance to review
the allegations contained in the memo?
Ms. Sanders. Just a few moments ago I was glancing through
here, and then when I met with your staff, yes.
Mr. Greenwood. Okay. As chief internal auditor of the
company were these the kinds of allegations that you should
have been made aware of?
Ms. Sanders. Anything to do with the field operations, yes,
especially the comment made about how come the HealthSouth
outpatient clinics treat patients without recertification, both
the revenue and carry it after being denied payment. Yes, I
should have been made aware of that.
Mr. Greenwood. All right. So you would expect that if
someone in the company was aware that these allegations were
being made, the appropriate thing to do would have been to
bring that to your attention so that you could have used your
capacities and resources to ascertain its veracity, is that
fair to say?
Ms. Sanders. Correct, yes.
Mr. Greenwood. Okay. Did Mr. Horton or Mr. Owens ever
advise you that they were undertaking an internal investigation
in the allegations of accounting fraud at the company?
Ms. Sanders. No, sir. They did not.
Mr. Greenwood. Okay. Would you turn to Tab 38 now, please?
Ms. Sanders. Yes.
Mr. Greenwood. Okay. This is a memo that apparently you
sent to Bill Horton on December 9, 1998, having to do with
outpatient audits between 1996 and 1998. Is that right?
Ms. Sanders. Correct.
Mr. Greenwood. Okay. Do you recall writing this memo?
Ms. Sanders. Yes, I do.
Mr. Greenwood. Okay. And what was your understanding of the
request for this information?
Ms. Sanders. That would have been, and in reading it, it
says: ``Per your request below is the summary of the insurance
verification portion.'' They were asking me are we doing--that
would deal with the recertification. Did we verify that there
was insurance on a patient before we treated them.
Mr. Greenwood. And what was the answer to that?
Ms. Sanders. The answer was yes, we did go through that
process in our facility.
Mr. Greenwood. Okay. Let me turn to Mr. Smith, to whom I
think no questions have been addressed yet. I do not want you
to feel left out, Mr. Smith.
How long have you been with the internal audit department
at HealthSouth?
Mr. Smith. Going on 9 years.
Mr. Greenwood. Okay. And how long have you been Vice
President of Internal Audit?
Mr. Smith. Since 1999.
Mr. Greenwood. Okay. And during the course of your tenure
as head of internal audit how often have you met with the audit
committee of the board of directors?
Mr. Smith. Say that again, please.
Mr. Greenwood. Okay. How long and during the course of your
tenure as head of internal audit, how often have you met with
the audit committee of the board of directors?
Mr. Smith. I have met with the audit committee twice on an
individual basis, but I met with them at our board meetings as
well.
Mr. Greenwood. Okay. So you mean when you attended the
board meetings?
Mr. Smith. Yes.
Mr. Greenwood. Okay. So the other time other than at
official board meetings, the one time that you met with them,
was that per their request?
Mr. Smith. Yes.
Mr. Greenwood. Okay. And so they only ever asked to meet
with you once in 9 years?
Mr. Smith. Twice. Twice.
Mr. Greenwood. Twice in 9 years?
Mr. Smith. Yes.
Mr. Greenwood. Okay. To whom have you been reporting?
Mr. Smith. I have been reporting--currently or at that
time?
Mr. Greenwood. Over the course of the 9 years.
Mr. Smith. I was reporting to Teresa Sanders when she was
at HealthSouth.
Mr. Greenwood. Okay.
Mr. Smith. And then when she left, then I took over the
department, I reported to Richard Scrushy.
Mr. Greenwood. Okay. Did you ever question the fact that as
head of internal audit you never met with the audit committee
other than once or twice?
Mr. Smith. No, I just--you know, in an off-the-wall
conversation, I think I had asked Teresa at one time did she
ever meet with them. And she said she was having the same type
problems.
Mr. Greenwood. Yes. Have you held similar capacity in other
companies prior to----
Mr. Smith. No.
Mr. Greenwood. Okay. So did you have a sense of what--you
must have thought that something was amiss if you--that they
were not asking to meet with you if you brought it to Ms.
Sanders' attention and said have you--because you just said
have you had the same problem?
Mr. Smith. Well, yes. I asked were we supposed to meet with
the audit committee on an individual basis. And I asked her had
she been meeting with them as well.
Mr. Greenwood. Okay. And in the course of your tenure
there, I do not know if you belonged to associations or you had
opportunities to interact with other individuals in other
companies in your position. Did you, in fact, did you have
occasions in the course of those 9 years to talk to other
people from other companies who did the kind of work that you
did or held the kind of positions that you did?
Mr. Smith. Yes. By attending seminars.
Mr. Greenwood. You went to seminars?
Mr. Smith. Yes.
Mr. Greenwood. Did you ever at any of those seminars say to
your colleagues, you know, it is kind of weird at HealthSouth
the audit committee has only ever asked to meet with me once or
twice, is that the way it is at your company? Or did you have
seminars where they said you should expect to meet with your
auditors X number of times a year? I mean, was there a standard
that you were aware of that would have seem to have been the
right kind of communications with the board?
Mr. Smith. No. It was never addressed in any of our
seminars and I did not have any contact with----
Mr. Greenwood. So what made you think that it was a
problem?
Mr. Smith. Well, I just felt like that I probably should be
meeting with the audit committee as well.
Mr. Greenwood. Why did you feel that?
Mr. Smith. If I had anything to share with them, you know,
the audit committee should know that.
Mr. Greenwood. And did you have things that you would have
liked to have shared with them?
Mr. Smith. No. It would have just been my report.
Mr. Greenwood. Okay. But you thought that you should on a
routine basis share your reports with the auditing committee of
the board of directors?
Mr. Smith. That's correct.
Mr. Greenwood. Okay. Let me go back to Mr. Vines in the
time that I have.
If you would turn to Tab 46, please, in your notebook.
Okay. And could you identify that document for us?
Mr. Vines. That is an email that I sent to HealthSouth's
auditor.
Mr. Greenwood. Which was whom?
Mr. Vines. Ernst & Young.
Mr. Greenwood. And when did you send that?
Mr. Vines. In June or July 2002.
Mr. Greenwood. Okay. So you sent that to Ernst & Young in
2002. Were you with the company at that point?
Mr. Vines. No. I left in May 2002.
Mr. Greenwood. In when?
Mr. Vines. In May.
Mr. Greenwood. So this is about a month after you left?
Mr. Vines. Yes.
Mr. Greenwood. You decided to send an email to Ernst &
Young. And give us the gist of what that email says?
Mr. Vines. Basically that HealthSouth was moving expenses
out of the expense accounts to capital accounts.
Mr. Greenwood. Okay. And why did you do that?
Mr. Vines. Because the expenses that were being moved
weren't legitimate expenses that should be capitalized.
Mr. Greenwood. Yes, but you were not with the company
anymore, so what do you care?
Mr. Vines. Just I thought the problem should be addressed.
It should have been reported to the auditor.
Mr. Greenwood. So I do not want to put words in your mouth,
but you had said earlier that you were afraid that if you blew
the whistle on this, that you might get fired. Now that you
left the company, you felt there was nothing to lose, so you
let----
Mr. Vines. Correct.
Mr. Greenwood. Okay. And did Ernst & Young ever respond to
your memo?
Mr. Vines. Not to me, they did not, not.
Mr. Greenwood. And you gave them an email address so that
they could respond?
Mr. Vines. Yes.
Mr. Greenwood. But they did not? You never heard a word
from them again?
Mr. Vines. No.
Mr. Greenwood. Did you try to contact them anymore after
that?
Mr. Vines. No.
Mr. Greenwood. It just went into a black hole, and that was
the end of it? You never heard of them?
Mr. Vines. Yes.
Mr. Greenwood. Okay. My time has expired. The gentlelady
from Colorado is recognized for 10 minutes.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Smith, you succeeded Ms. Sanders in your position,
correct?
Mr. Smith. Correct.
Ms. DeGette. Thank you.
And how many facilities does HealthSouth have now, right
now?
Mr. Smith. I do not have the exact figures, because they've
closed some. But I would say around, maybe, 1700 roughly.
Ms. DeGette. And so that would be around the same as when
Ms. Sanders left, maybe more?
Mr. Smith. Yes, could be.
Ms. DeGette. Okay. How many auditors do you have right now?
Mr. Smith. Currently I have including myself, there's 5.
Ms. DeGette. So you have gone down from 10 when she was
there to now 5, correct?
Mr. Smith. Correct.
Ms. DeGette. And in August 2002 that is when the budget
cuts came through, right?
Mr. Smith. That is correct.
Ms. DeGette. Did you tell the audit committee of the board
about the fact that all of these 1700, or however many
facilities, that you were now being cut back to 5 auditors?
Mr. Smith. I did and----
Ms. DeGette. And what was the response?
Mr. Smith. I mean, they listened to me. They did not really
comment on it. They just thanked me for sharing that with them,
and if I had any----
Ms. DeGette. When was that?
Mr. Smith. That was in August 2002.
Ms. DeGette. So over a year ago, right?
Mr. Smith. Yes.
Ms. DeGette. Have you gotten any more auditors since then?
Mr. Smith. I have not. I am in the process of hiring more
now.
Ms. DeGette. So you are going to be all the way up to 6?
Mr. Smith. Six, correct.
Ms. DeGette. Do you think that's enough to really conduct
full audits of all these facilities?
Mr. Smith. No, I do not.
Ms. DeGette. How many do you think you should have on
staff?
Mr. Smith. You know, I would have to study numbers and do
some planning to see. But, I mean, I am not--I could not answer
that right now.
Ms. DeGette. Okay. But certainly more than 6?
Mr. Smith. Oh, yes.
Ms. DeGette. Probably a lot more than 10?
Mr. Smith. Yes.
Ms. DeGette. Do you currently have access to the corporate
books?
Mr. Smith. No, I do not.
Ms. DeGette. So you are in the same position that Ms.
Sanders was in, correct?
Mr. Smith. That is correct.
Ms. DeGette. And who are you reporting to right now?
Mr. Smith. I am reporting to Bob May.
Ms. DeGette. Okay. And do you think you need to have all
that access knowing what you know now to all the corporate
books to be able to conduct internal audits?
Mr. Smith. I think it would be helpful to have access to
that information.
Ms. DeGette. So do I. So what do you intend to do about
that?
Mr. Smith. I would like to meet with the board and
specifically the audit committee to address that issue with
them.
Ms. DeGette. Okay. Have you met with the board to talk
about these audit issues since all this has transpired?
Mr. Smith. I have not.
Ms. DeGette. Have they requested to meet with you?
Mr. Smith. They have not.
Ms. DeGette. Ms. Sanders, I wanted to ask you there was a
period in 1997 you said you did not have access to the
corporate ledgers, but you had access to the facility ledgers,
correct?
Ms. Sanders. Correct.
Ms. DeGette. But at some point in 1997 your access to those
ledgers was cutoff, too, was it not?
Ms. Sanders. Correct. It was the computer access to it. I
still had access to the hard copies.
Ms. DeGette. And why was that?
Ms. Sanders. I do not know why. I just know that when we
went in to access that information I was told by our ITG
department that Mike Martin, who was the CFO, had turned that
access of.
Ms. DeGette. Did you talk to Mike Martin about that?
Ms. Sanders. I attempted to talk to him, yes.
Ms. DeGette. And what happened?
Ms. Sanders. He told me that I did not need that access to
do my job. We got into a short confrontation about that, and
then I left, and left the meeting with we could go to Mr.
Scrushy with this.
Ms. DeGette. And why did you feel it was important for you
to get computer access versus just access to the hard copy?
Ms. Sanders. Well, with close to 2,000 facilities it made
it a little bit easier to do planning if you could do it
through computer than having to go actually pull a hard copy.
Ms. DeGette. It is hard to do that to the hard copy, is it
not?
Ms. Sanders. Correct. Yes. There are times----
Ms. DeGette. A job I once actually did it recently, and it
is hard.
Did you ever get your computer access back?
Ms. Sanders. Yes, I did.
Ms. DeGette. How long were you without that access?
Ms. Sanders. I was probably without it for about 2 or 3
months. I know that I finally went and talked to Tony Tanner
about it and he said that he would help me with talking to Mike
about it. And we did get that access turned on.
Ms. DeGette. And Mike never gave you or Tony an explanation
as to why that access was revoked?
Ms. Sanders. I do not know if he gave it to Tony or not. I
know he did not give it to me.
Ms. DeGette. Did you ever tell Mr. Scrushy about that,
about the denial of the access?
Ms. Sanders. No, I did not. No. No.
Ms. DeGette. Mr. Cullison, I wanted to ask you some
questions. You set up the Compliance Department at HealthSouth,
did you not?
Ms. Cullison. Yes.
Ms. DeGette. Had you ever done that before?
Ms. Cullison. No.
Ms. DeGette. Okay. And who asked you to do that?
Ms. Cullison. I was approached by Teresa Sanders, who was
my supervisor in the internal audit department. And she told me
that they were looking at developing this program and asked if
I would be interested.
Ms. DeGette. Okay. And the company hired Strategic
Management Systems to assist you in developing compliance
policy and procedures, is that right?
Ms. Cullison. Correct.
Ms. DeGette. And that company is headed by Richard
Kusserow, a former Inspector General of the Department of HHS,
as far as I know, is that right?
Ms. Cullison. Correct.
Ms. DeGette. Now, if you will look at Tab 98 in the
notebook there. He sent a letter to you on December 3, 1997 and
do you recognize that?
Ms. Cullison. Yes.
Ms. DeGette. Did you receive that?
Ms. Cullison. Yes.
Ms. DeGette. Now in that letter it says that there are
occasions that would arise when the legal counsel needed to
direct the issue resolution process and that HealthSouth needed
a policy on when to do that. Is that correct?
Ms. Cullison. Correct.
Ms. DeGette. And Mr. Kusserow provided that kind of
protocol, right?
Ms. Cullison. Yes.
Ms. DeGette. What it said is when there are allegations of
criminal law violations the legal counsel should be notified
immediately and that the legal counsel should conduct the
investigation, evaluate the facts and evidence and to determine
whether a criminal violation may have occurred and determine
how to handle the issue. Is that right?
Ms. Cullison. Correct.
Ms. DeGette. And do you know did the compliance office
adopt those protocols?
Ms. Cullison. I remember that we went through the process
of reviewing the draft policies that SMS presented to us. I do
not, on the other hand, remember which ones wee adopted. I do
not recall which ones were adopted.
Ms. DeGette. Who was in charge of adopting the protocols?
Ms. Cullison. Ultimately it would have been the compliance
officer, Tony Tanner.
Ms. DeGette. And is it your belief that the protocol
between the compliance office and legal counsel was adopted,
that specific one?
Ms. Cullison. I do not recall if that specific one was
adopted or not.
Ms. DeGette. Did you ever utilize those procedures?
Ms. Cullison. The procedures that were adopted we had in
our office and we had access to----
Ms. DeGette. But you do not remember which ones they were?
Ms. Cullison. I do not recall which ones specifically were,
yes.
Ms. DeGette. But did you ever refer anything to legal
counsel?
Ms. Cullison. I did on an informal basis, yes.
Ms. DeGette. Okay. And that would be, I suppose,
contemplated by the protocol on the compliance office?
Ms. Cullison. Right.
Ms. DeGette. Now, Ms. Henze alleged fraud, which is a
criminal violation. Did you alert the legal counsel?
Ms. Cullison. I did not alert them at that time.
Ms. DeGette. Okay. Did you suggest to Mr. Tanner that he
call in legal counsel about these allegations?
Ms. Cullison. I do not recall doing that.
Ms. DeGette. Okay. And why not?
Ms. Cullison. Probably at the time I felt that that would
have been a call better made by him.
Ms. DeGette. So you thought that he would do it?
Ms. Cullison. Right.
Ms. DeGette. Now, Ms. Henze suggested that you do some
computer queries to see if what she said was accurate. Did you
do those queries?
Ms. Cullison. Yes.
Ms. DeGette. And what did you find?
Ms. Cullison. I found after running those queries, I found
some large dollar amount journal entries that were consistent
with what she had brought to me.
Ms. DeGette. And did you give those, the results of those
queries to Mr. Tanner?
Ms. Cullison. Yes.
Ms. DeGette. What happened then?
Ms. Cullison. At that point, that was when he informed me
that he was going to look into it.
Ms. DeGette. And did you ever follow up with him to see
what he had done?
Ms. Cullison. I did not get the details of his
investigation. The only response I received or the only
response that I was given was that the matter had been looked
into.
Ms. DeGette. So you never knew anything more than that?
Ms. Cullison. No.
Ms. DeGette. Was this the standard way that you operated?
Was this unusual?
Ms. Cullison. This was an unusual type of case. Generally
he would not have been involved in an investigation. But due to
the high level of management that was involved in the
allegations, it was not unusual that it would have gone to him.
Ms. DeGette. And also the credibility of Ms. Henze, which I
think you have said was impacted?
Ms. Cullison. Exactly. Right.
Ms. DeGette. Now, so how many times do you think you took
situations like this to Mr. Tanner?
After consulting with counsel, your answer?
Ms. Cullison. Right. We only had the one allegation of
fraud, of a fraud nature from Diana, and that was the only one
that went to Mr. Tanner. The only one that we received.
Ms. DeGette. Were there any other issues that you thought
were big enough to take to Mr. Tanner?
Ms. Cullison. For example, I remember a sexual harassment
situation that went to Mr. Tanner because of the high level of
management that it involved as well.
Ms. DeGette. So it was very unusual?
Ms. Cullison. Right.
Ms. DeGette. Yes. And the sexual harassment situation, Mr.
Tanner also found that the allegations were unsubstantiated, is
that not correct? That was his initial finding?
Ms. Cullison. I think through the course of his
investigation that case was put to rest as well.
Ms. DeGette. Now, do you know if the board of directors was
ever made aware of this high level complaint against the senior
officials of the company?
Ms. Cullison. I do not know that they were made aware of
it.
Ms. DeGette. And what happened to the records in this case?
Ms. Cullison. We had a policy within the compliance
department that once a case had been closed, it would remain in
our system for 90 days and then it would be purged from our
system. And the only thing that would remain as a record of
that case was general information like the date of the call,
whether--you know, what type of call it was but not specific
information.
Ms. DeGette. And so do you know if those records still
exist anymore?
Ms. Cullison. Yes, they do.
Ms. DeGette. I do not have anymore questions, Mr. Chairman.
I just--I want to add my thanks to all the witnesses for
coming forward. But I also want to add I have been here for all
of these corporate responsibility hearings. And I think that if
there is any one thing that the testimony today and the
testimony we have been hearing for a couple of years should
teach is is that when employees of a company see something
wrong, they really need to find a way to take it to places
other than their immediate supervisors, who are often the ones
that are guilty of the wrongdoing.
And I was thinking about this over the lunch break. In so
many of these cases what we have had is a very charismatic
powerful leader of a company. Enron, Qwest, ImClone. And the
employees, even if they see wrongdoing are afraid to take it
outside the normal channels. So I think probably all of you
have learned a good lesson, and I know we certainly have. And I
would hope that throughout corporate America employees would be
sitting there saying today, you know, if I am seeing some
wrongdoing, I have some kind of duty to bring this up and not
just to the people who are committing the wrongdoing.
So, those are just my thoughts.
And, again, I want to thank everybody here. Because I know
everybody here has tried to work the best that they could
within the system. And I do appreciate your testimony.
Mr. Greenwood. The Chair thanks the gentlelady.
The gentleman from Oregon, Mr. Walden is recognized for 10
minutes.
Mr. Walden. Thank you, Mr. Chairman.
Ms. Sanders, I have a question for you and it relates to
the audits by Ernst & Young. Do you think it was appropriate to
classify the Pristine Audits as audit related services?
Ms. Sanders. As audit related services?
Mr. Walden. Yes.
Ms. Sanders. Like financial audit related services?
Mr. Walden. Right.
Ms. Sanders. No, I do not.
Mr. Walden. And yet it was done that way, right?
Ms. Sanders. To my knowledge, that is what I have heard.
Mr. Walden. Yes. It does not seem right to me. It is sort
of a white glove test to see whether the trash is--what all did
they do? Trash taken out, rooms clean?
Ms. Sanders. Right. The reception is friendly.
Mr. Walden. I mean, that's a function.
Ms. Sanders. Right. Business license posted. I mean, it was
very generic. Things that someone could walk in the door and be
able to do and check yes or no on.
Mr. Walden. Why would they have classified them as audit
related?
Ms. Sanders. I do not know. That was my----
Mr. Walden. Does anyone on the panel know that? The answer
to that?
Does anyone on the panel know if the board meetings were
taped, given the hidden cameras and microphones and the fact, I
understand Mr. Scrushy even had a tape recorder going in his
pick-up, I understand? His folks here were handing out copies
of those tapes gratuitously out here in the lobby earlier. Do
you know if the board--we do not have minutes from the board
meetings. They could not keep track of that, but they could,
you know, wire his pick-up. Do you know, were any of these
board meetings taped?
Ms. Sanders. No.
Mr. Walden. All right. Mr. Cohen, can you refer to Tab 27,
please sir, in the document binder? This was taken from the
transcript of HealthSouth's conference call to discuss third
quarter results. You will see beginning on line 4 Mr. Scrushy
states: ``I would like to begin by saying the third quarter was
a challenging quarter for the company. The introduction of
Transmittal 1753 certainly had an impact on the company.''
In your opinion was the estimated impact of Transmittal
1753 going to have an immediate revenue impact on the company,
and if not, why? And I know we have touched on this earlier,
but I would like to go back to it?
Mr. Cohen. Based on what we found while we were there,
there had not appeared to be any guidance given to the field as
to how to code. We did find one memo that had gone out telling
everybody to begin using group codes.
Mr. Walden. Right.
Mr. Cohen. However, when we talked to people in the field,
people fairly well admitted they disregarded that memo. Because
they thought it was inappropriate advice.
On about September 13 CMS did hold an open forum where they
discussed more about the different scenarios and how the coding
could take place. And after that we would have expected to see
some impact. And, indeed, when we did look at the end of
September, we saw some impact. But, as I said before----
Mr. Walden. But as of that conference call?
Mr. Cohen. We did not study earlier in the third quarter.
Based on our conversations we would not have expected to see a
significant amount of change in the way coding was done and
certainly through that period of time we found a dominus amount
of impact in how people coded commercial, and that was mainly
out of the hospital division.
Mr. Walden. And the commercial was the biggest part of the
book of business, was it not?
Mr. Cohen. Yes, and that was--it was also the toughest part
to figure out what would happen long term as to how they would
respond to a change in Medicare.
Mr. Walden. Okay. How much was FTI paid to perform the
analysis of the impact of Transmittal 1753 on HealthSouth's
revenue, and for that amount of money did HealthSouth board of
directors receive a final product with the analysis FTI had
performed?
Mr. Cohen. We received, I believe, around $1.4 million.
Mr. Walden. All right.
Mr. Cohen. To prepare to the analysis.
Mr. Walden. Did the board ever see a final product?
Mr. Cohen. They never saw a final product. They never saw--
they were never given a report from us because we told the
counsel, we were working for counsel, a report went to
Fulbright.
Mr. Walden. Right.
Mr. Cohen. I do not know if they then subsequently shared
the draft that we gave Fulbright with the board.
Mr. Walden. Right.
Mr. Cohen. But we did indicate to Fulbright as well as we
indicated to the company that unless we resolve--until we were
able to resolve the discrepancies we saw, we were not going to
take that report to final.
Mr. Walden. And those discrepancies required additional
information which you sought?
Mr. Cohen. Yes.
Mr. Walden. And you sought that from Mr. Scrushy?
Mr. Cohen. No. We sought--I sent--we worked entirely
through Bill Owens while we were there in terms of coordinating
data.
Mr. Walden. And who did he report to?
Mr. Cohen. Mr. Scrushy.
Mr. Walden. Thank you.
Mr. Cohen. And we sent a--I sent a note to him, an email on
November 6.
Mr. Walden. Right.
Mr. Cohen. Listing out the discrepancies and then also
requesting of him certain information and indicated the
information that we needed in order to complete that.
Mr. Walden. And Mr. Owens never got back to you?
Mr. Cohen. He never got back. Counsel was also notified of
the information that there was a discrepancy and we needed
further information.
Mr. Walden. Okay. And did the counsel ever pursue it that
you are aware of?
Mr. Cohen. There were two groups of counsel that we were
dealing with at the time. We were engaged by Fulbright &
Jaworski. I do not know what Fulbright & Jaworski did with that
information. I am not aware of what conversations they may have
had.
Mr. Walden. How much would it have cost you to finish the
report?
Mr. Cohen. The second counsel that we talked to was Lanny
Davis with Patton Boggs. He had asked us for a memo detailing
remaining cost to finish the report.
Mr. Walden. Right.
Mr. Cohen. That he said he wanted to discuss with Mr.
Scrushy.
The whole report including reporting to the board,
etcetera, was somewhere around $100,000 to just do the work
that we needed to confirm that number----
Mr. Walden. About 116, I think.
Mr. Cohen. Right. Somewhere in that neighborhood. Just to
do the work that we need to confirm the numbers in the report
was probably somewhere in the 40,000 or 50,000 range.
Mr. Walden. So you could have completed your report for
that amount, is that correct?
Mr. Cohen. Yes.
Mr. Walden. And they had already spent a million dollars on
you?
Mr. Cohen. A million four.
Mr. Walden. A million four? And for another, no more than
40,000 confirm another 116 altogether including the 40 you
could have wrapped it up?
Mr. Cohen. That is correct.
Mr. Walden. Do you think that asking for this additional
information it may have caused some--to suggest it might be not
in their benefit to have you finish that report?
Mr. Cohen. At the time, since it was an insider--insider
trading investigation, we figured they were going to want that
report finished.
Mr. Walden. But who asked for the report to begin with
through the law firm?
Mr. Cohen. Well, the law firm at the behest of--they were
engaged by the board.
Mr. Walden. By the board or Mr. Scrushy?
Mr. Cohen. I believe they were engaged by the board. I
might be incorrect, but I believe it is by the board.
Mr. Walden. Okay.
Mr. Cohen. And the law firm engaged us then to do one
component of their overall assessment, and that was to test the
validity of the $175 million assertion.
Mr. Walden. And so you go through all this process, the
board--let me understand this. The board asks the law firm to
do this study and you never end up finishing the study and the
board never sees it?
Mr. Cohen. I do not know if the board ever saw the draft or
not, but I never did complete the study.
Mr. Walden. Who was Lanny Davis retained by?
Mr. Cohen. I do not know. At some point we had
conversations with Lanny. Lanny had indicated that he retained
by the company. And I am telling you what I recollect, and that
is I had heard he was retained as a crises manager. Do not ask
me what that is.
Mr. Walden. So they thought they might have a crises on
their hands. What a concept.
Mr. Smith, I want to go to you because you're still there,
right?
Mr. Smith. Yes.
Mr. Walden. The auditing officer. And the auditing
committee at the board doesn't talk to you?
Mr. Smith. I talk directly--I talk weekly with Mr. May, CEO
of the company. But I have not talked with the audit committee.
Mr. Walden. That's phenomenal.
Mr. Smith. They get reports from me on audits, but I have
not had a one-on-one----
Mr. Walden. They do not call you in, you do not sit down,
you do not make your report to them independent----
Mr. Smith. No.
Mr. Walden. [continuing] of the CEO?
Mr. Smith. I have not met them, no.
Mr. Walden. They did not do that the last time either,
right, under Mr. Scrushy? Did they meet independently with
their own auditors?
Ms. Sanders. No, sir, they did not.
Mr. Walden. What kind of board is this? This is outrageous.
Ms. Sanders, going back to the amount of money charged by
Ernst & Young, Tab 44, are you surprised the amount charged for
the Pristine Audit was so much higher than the amount charged
for the annual audit?
Ms. Sanders. After seeing this document, yes sir, I am.
I've not seen----
Mr. Walden. I'll let you get to Tab 44. You'll see in the
year 2000 the annual audit cost $939,400 plus the quarterly
reviews of 87, so a million 27,000 let us say in 2000; a
million 165,000 in 2001 for the audit. And then for the
Pristine Audits it is a million and a quarter for 2000 and a
million 330,000. So they basically were spending more to check
the trash cans than to check the books?
Ms. Sanders. That--that would appear so, yes, sir. I was
not there, though, during these years.
Mr. Walden. You were not there during these years?
Ms. Sanders. I had--no, sir. I had left in 1999.
Mr. Walden. On, that is right. I'm sorry. So you do not
know who prepared these figures?
Ms. Sanders. No, sir. I do not.
Mr. Walden. All right. Let us see, let us go back to Mr.
Cohen.
Would you please refer to Tab 35 in our binder? Attached to
this email is a document entitled ``Fee Estimate for Remaining
Tasks''. On the line total remaining fees and expenses you have
116,756. So that was the estimate we were just talking about.
Mr. Cohen. That is correct.
Mr. Walden. Okay. Was there some push back from HealthSouth
on the additional cost involved?
Mr. Cohen. They had pushed back on the overall bill. On the
additional cost, we never got--we never got any response.
Mr. Walden. Did they pay the million dollar bill? The
million and a half?
Mr. Cohen. Yes, they did. Yes.
Mr. Walden. So they had already invested $1.4 million to
find out if there was some problem internally, but they did not
want to see the final result? Well, they did not want to pay
you to finish your work?
Mr. Cohen. They certainly for whatever reason did not
provide us the information we needed to complete a final
report.
Mr. Walden. Have you subsequent to that ever seen the
information?
Mr. Cohen. No.
Mr. Walden. Okay. All right. Did anyone at HealthSouth,
either employee or board member, request to see FTI's analyses
before it was completed?
Mr. Cohen. The only contact we had with the board was a
very early meeting where we met with, I believe it was Bob May
just wanted to know what we were doing. Never had any contact
after that.
We anticipated we would be--when we completed it, we would
be making a presentation to the board. But since we never
completed the report that never happened.
As a normal course we had planned on going down to
Birmingham----
Mr. Walden. Right.
Mr. Cohen. [continuing] to meet with Bill Owens and the
remaining senior staff that we had worked with to go through
the report with them and make sure there were not any glaring
mistakes----
Mr. Walden. Sure.
Mr. Cohen. [continuing] or things that we had missed. That
never occurred because they did not respond to us to the
November 16----
Mr. Walden. For the additional information?
Mr. Cohen. [continuing] for the additional information.
Mr. Walden. And that is pretty standard procedure, is it
not? You do other audits for other companies?
Mr. Cohen. Sure.
Mr. Walden. Is that correct? And is it not normal that an
audit committee you meet with them?
Mr. Cohen. You talking about the audit committee now?
Mr. Walden. Yes. I mean, I know there are several----
Mr. Cohen. Not related to this.
Mr. Walden. No, no, no. But just in general in the kinds of
audits you do?
Mr. Cohen. Well, I am not an auditor, but I am certainly
aware of that, yes. Typically, we would be meeting with the
audit committee.
Mr. Walden. Would that not be a standard corporate
practice?
Mr. Cohen. Oh, yes.
Mr. Walden. In a well run company?
Mr. Cohen. Certainly.
Mr. Walden. The audit committee would have some
independence from its management and you would report to that
audit committee sometimes with management not there?
Mr. Cohen. Absolutely.
Mr. Walden. Especially if you saw a problem?
Mr. Cohen. It certainly has evolved over the years. I mean,
if you went back 10 years, what you are hearing today was
probably fairly normal course. But it has evolved over time to
where it is pretty much an independent practice where whoever
is in charge of internal audit will report directly to the
audit committee of the board.
Mr. Walden. Ms. Sanders, is that not what you do now?
Report independently?
Ms. Sanders. I report--or reported when I worked with
Eastern Health System, yes. I reported directly to the CEO and
also directly to the audit committee.
Mr. Walden. And you could meet with either separately and
not fear for your job?
Ms. Sanders. Correct. I met on a quarterly basis alone with
the audit committee, yes.
Mr. Walden. But at HealthSouth you did not have that
opportunity?
Ms. Sanders. No, sir, I did not.
Mr. Walden. And at the other health company, I am sorry,
Eastern----
Ms. Sanders. Eastern Health System.
Mr. Walden. Eastern Health. Did you have access to the
corporate books as well as anything else you wanted to look at?
Ms. Sanders. Yes, sir, I did.
Mr. Walden. But at HealthSouth you did not?
Ms. Sanders. I did not, no.
Mr. Walden. So, I mean, maybe I am--well, it just strikes
me that there were firewalls put up to make sure that the
people doing the audits could never see everything they needed
to see to get a clear picture of whether or not these books
were being manipulated. Is that an accurate picture from those
of you were there who are not there now?
Ms. Sanders. We were hired to audit the field, and that is
what we audited. And, so that is--I mean----
Mr. Walden. Okay. I understand. Thank you very much.
Mr. Greenwood. The time of the gentleman has expired.
The gentleman from Michigan, Mr. Rogers is recognized for
10 minutes for inquiry.
Mr. Rogers. Thank you, Mr. Chairman.
Ms. Sanders, I am just trying to understand this a little
better. Just for my own edification. When you were hired in
1990 were you hired for internal audit functions or operational
audit functions?
Ms. Sanders. I was hired as the internal auditor, but it
was very well defined by Mr. Scrushy that I was hired to audit
the field and it was the financial audit of the field, the
financial information that they would be submitting to the
corporate office to post to their general ledgers which would
generate the financial statement.
Mr. Rogers. So you were more in the facilities? You were
not for the corporate finances, if you will?
Ms. Sanders. Correct. Yes.
Mr. Rogers. Okay. And it is my understanding there is no
law or was not a law at the time that set any parameters for
what an internal auditors could or should or would do according
to the specifics of the law, is that correct?
Ms. Sanders. Correct.
Mr. Rogers. Okay. So they could define by law any type of
system that they wanted to do, including one where you were
excluded from the finances of the corporation and only did
operational auditing, is that correct?
Ms. Sanders. Correct, yes.
Mr. Rogers. You testified earlier that rumors were
circulating as to fraud that raised some concern for you. Now
you did not see anything within your audit purview in the
facilities that indicated to you that there would be fraud, is
that correct?
Ms. Sanders. That is correct.
Mr. Rogers. But you heard a rumor that there may be some
fraudulent activity?
Ms. Sanders. I heard that they--they heard the rumor that
they were playing with the numbers.
Mr. Rogers. Can I ask, how did you hear that rumor? I mean,
how would you come about that kind of information?
Ms. Sanders. I heard it once from a controller at one of
the hospital. She did not elaborate on how they were playing
with the numbers or exactly what she was talking about. It was
a just comment that was made.
And then I also heard it from a senior person at the
corporate office.
Mr. Rogers. And I am at a point in your testimony here from
the asset freeze hearing. And the question was posed ``So you
have got rumors circulating of some notions about fraud going
on. You are the in-house auditor of the company and you did
nothing about it?'' End of question.
Answer: ``You could look at it that way, yes sir.'' So what
you were saying then is that you did not feel that there was
anywhere that you could go to talk about that information, is
that correct?
Ms. Sanders. I did not really have any documented
information to take to be able to investigate and see if the
rumors were valid.
Mr. Rogers. So you had no direct knowledge?
Ms. Sanders. Correct.
Mr. Rogers. Okay. And you also said that you heard even
apparently these Pristine Audits, but you had no direct
knowledge of the operation of Pristine Audits, did you?
Ms. Sanders. No. I had--I had the direct knowledge of the
Pristine Audits. I did not have direct knowledge of where they
were classifying the expenses on the financial statements. That
was not part of my function. It was always intended to be a
quality standards program; that was what the original proposal
was.
Mr. Rogers. Now, was the scope of your responsibility known
both to the senior officers and those below you in the
different functions of the compliance department and other
places? They knew that your function was separate from the
financial auditors, or did they?
Ms. Sanders. I do not know that they really knew that there
was a separation between the two of us. I do know that they
knew that I was responsible for doing the field audits, yes.
Mr. Rogers. At anytime did you talk to the external
auditors about your concerns about these rumors that you were
hearing?
Ms. Sanders. No, I did not. And the main reason that I did
not is there was not anything to substantiate that the rumor
was even valid, and I would not have felt comfortable going
either up the chain to senior level management to the external
auditors without something to back up the rumors. I have heard
these rumors, I have got documentation to prove it exists.
Mr. Rogers. To some degree you were a victim as well by the
numbers that you were getting in your operational audits as
well?
Ms. Sanders. Correct. Yes.
Mr. Rogers. Okay. So, and I would assume you are a
consummate professional and you take your job very seriously.
Obviously, you have had the courage to testify today. It can
happen in these companies, can it not? If there is that much
fraud and that much conspiracy, that widespread and throughout
a corporation culture, these internal audit operations can be
fooled as well, cannot they?
Ms. Sanders. Yes, they can. They teach us that in our
initial auditing courses and any of our certified fraud
training, and any of that. If there is collusion in a company,
there is not anything that you can do to detect that.
Mr. Rogers. This is just more of a gee wiz question for me.
The SEC has just come out to require listed companies to have
an internal audit function. And prior to that the language is
``an effective internal control.'' Big difference there, do you
not think, in your role as a professional?
Ms. Sanders. Yes.
Mr. Rogers. And do you think it would help in the future
for these companies, make it a little bit more difficult for
professionals like you if you can be fooled to have an internal
audit function as opposed to an open ended effective internal
control? Do you think that would be effective?
Ms. Sanders. Yes, it would.
Mr. Rogers. I mean, that is something that we will be
looking at as a result of these hearings.
And I hope you all understand, I am just understanding it
myself to make sure that any action that we take here, make
sure that we go after the bad guys, the folks who are causing
these problems.
And I just, again for the record, there is no time that you
went to either internal operations or external operations to
say hey there is a--we have a fraud problem here? And mainly
because you did not know, accordingly to your testimony?
Ms. Sanders. I did not know. No, sir. The only--only
comments that I made were to Mr. Scrushy during my exit
conference that there were--I was having issues with Mike
Martin, that he had turned off my access. We had gotten that
turned back on. And he asked me why I felt like Mike had done
that. And we got into a discussion about Mike and the CFO. So--
--
Mr. Rogers. Okay. In your history as an auditor in other
places, was it unusual that you would do this operational audit
only or is that something that a company that might----
Ms. Sanders. It is not unusual.
Mr. Rogers. Not unusual?
Ms. Sanders. No.
Mr. Rogers. I am going to open it up to the panel. I am
still trying to understand the culture of fear that we have
heard from many of the employees, or at least from testimony
that we have gleaned from the past. And I am wondering if
anybody can tell me other than something that we have talked
about earlier today, that might help me understand completely
this culture of fear that would even when you got to the point
where you really understood that this--you were participating,
quite frankly, in a fraudulent act that maybe this is not my
place or my time to relay that information to either a superior
or an external operation either through the hotline compliance,
Ernst & Young or others. And I am going to open end that
question to anybody.
Ms. DeGette. Will the gentleman yield?
Mr. Rogers. Yes.
Ms. DeGette. I would assume you are not trying to get any
of the panel members to admit to participating in a fraudulent
act?
Mr. Rogers. No, absolutely not.
Ms. DeGette. That makes me be nervous when you say that.
Mr. Rogers. No. I mean, other than some of these folks
were, obviously, participating in acts and why they are
cooperating witnesses at this point because they had firsthand
knowledge of those activities. And, obviously, something in
them said, hey, I am going to do my best. But what was that
culture? I am more the culture of fear than your activity. I am
not really interested in you telling me what you did other than
what was that fear factor that said I am not going to take the
extra step to go? That was--I am just curious. I want to
understand the culture of fear in this company that got to us
to where we are today. It existed.
Nobody wants to step up to that one?
Thank you, Mr. Chairman. I have no further questions.
Mr. Greenwood. The Chair thanks the gentleman.
Before I excuse this panel, just two more questions.
Ms. Henze, you are the assistant controller of HealthSouth
today. Do you see a difference between the company, the way the
company was run when Mr. Scrushy was there versus the way it is
operating now under new management?
Ms. Henze. Yes, sir.
Mr. Greenwood. Could you describe that difference?
Ms. Henze. Just the general atmosphere is a lot more
relaxed. It seems to be a lot more open door. Mr. Bob May is
the acting CEO and, you know, I have--there is many occasion. I
have seen him in the cafeteria, walked up to him, gone to his
office just said ``hey, something that never occurred.''
I mean, the little things. Like there was a private
entrance that only Mr. Scrushy could come into the company
campus. As soon the new leadership came, they opened it up to
everybody so all employees could use any entrance that was
available.
They allowed us now to go out on the back deck. Just a nice
little deck where you can stand by the waterfall. We were not
really--we were--I do not know if hinder is the right word, but
discouraged from going out there and standing. We are allowed
to go out there now.
There is picnic tables.
I mean, it is just a lot nicer atmosphere and----
Mr. Greenwood. And how about the financial?
Ms. Henze. Oh, I am sorry.
Mr. Greenwood. That is quite all right. That is all very
interesting. But how about the financial position of the
company? Do you feel confident that it is going to be able to
survive this?
Ms. Henze. Yes, I do.
Mr. Greenwood. Okay.
You all have long been involved with this company, and you
all, I think, were here when Mr. Scrushy was here. My guess is
you have all seen the ``60 Minutes'' tape in which Mr. Scrushy
says that he is perfectly innocent, he did not know about any
of these shenanigans, did not know that the books were being
falsified. He had the terrible bad luck to hire 5 corrupt CFOs
in a row and 10 other company executives who hide all of this
behind his innocent back.
Do any one of you based on Mr. Scrushy's management style
as you have known it, does anyone of you believe him? Okay.
Thank you for coming. And thank you for your time and for
you openness, and for your willingness to try to do the right
thing.
You are excused.
Okay. We now call forward our third and final panel of
witnesses consisting of: Mr. William Horton, Former Executive
Vice President and Corporate Counsel of HealthSouth
Corporation; Mr. Brandon Hale, Former Executive Vice President
of Administration, Corporate Security and Compliance Officer
from HealthSouth Corporation; Mr. James Goodreau, Former Chief
of Security, HealthSouth Corporation, and; Mr. Anthony Tanner,
Founder and Former Corporate Secretary and Compliance Officer
at HealthSouth Corporation.
Gentleman, we welcome you.
Okay. Again, we welcome you. I think you have observed from
the other panels that it is the practice of this subcommittee
to take testimony under oath. Do any of you object to giving
your testimony under oath this afternoon? Okay.
Seeing no such objection, I need to let you know that
pursuant to the rules of this Committee and the House, you are
entitled to be represented by counsel. Do any of you wish to be
represented by counsel today?
Mr. Horton? You need to pull your microphone over and turn
the button on. Try now. There you go.
Mr. Horton. Thank you, Mr. Chairman.
My counsel William Baker and Tamara Smith are behind me.
Mr. Greenwood. Okay. Would you gentlemen raise your hands.
Thank you.
Mr. Hale?
Mr. Hale. Mr. Chairman, my attorney is David Burn and Paige
Jackson are behind me.
Mr. Greenwood. Okay. Welcome.
Mr. Goodreau?
Mr. Goodreau. Mr. Chairman, my attorney Fred Sinclair is
behind me, sir.
Mr. Greenwood. Very well, sir.
Mr. Tanner?
Mr. Tanner. Mr. Chairman, my attorney Jack Sharman is
behind me.
Mr. Greenwood. Okay. Mr. Tanner, I need to ask you, do you
have any difficulty rising to----
Mr. Tanner. It would be easier----
Mr. Greenwood. All right. I am going to ask Mr. Horton, Mr.
Hale, Mr. Goodreau to stand and Mr. Tanner to just raise your
right hand as they do.
[Witnesses sworn.]
Mr. Greenwood. Okay. You are under oath.
And, Mr. Horton, do you have an opening statement?
TESTIMONY OF WILLIAM HORTON, FORMER EXECUTIVE VICE PRESIDENT
AND CORPORATE COUNSEL, HEALTHSOUTH CORPORATION; BRANDON HALE,
FORMER EXECUTIVE VICE PRESIDENT OF ADMINISTRATION, CORPORATE
SECURITY AND COMPLIANCE OFFICER, HEALTHSOUTH CORPORATION; JAMES
GOODREAU, FORMER CHIEF OF SECURITY, HEALTHSOUTH CORPORATION;
AND ANTHONY TANNER, FOUNDER AND FORMER CORPORATE SECRETARY AND
COMPLIANCE OFFICER, HEALTHSOUTH CORPORATION
Mr. Horton. Mr. Chairman, I am Bill Horton from Birmingham,
Alabama. I was formerly Executive Vice President and Corporate
Counsel of HealthSouth. Pleased to be here today and try to
answer any questions the subcommittee may have.
Mr. Greenwood. Mr. Hale, do you have an opening statement?
TESTIMONY OF BRANDON HALE
Mr. Hale. Mr. Chairman, I do not have an opening statement
prepared. I am the former Executive Vice President of
Administration, and I am here to answer questions today.
Mr. Greenwood. Yes, sir.
Mr. Goodreau?
TESTIMONY OF JIM GOODREAU
Mr. Goodreau. Mr. Chairman, I am Jim Goodreau, and I was
the former Chief of Security for HealthSouth. And I am here to
answer any questions you have to ask.
Mr. Greenwood. Okay.
And Mr. Tanner?
TESTIMONY OF ANTHONY TANNER
Mr. Tanner. Mr. Chairman, I am a founder and a retired
Executive Vice President of the company, and I have no formal
statement.
Mr. Greenwood. Okay. The Chair recognizes himself for 10
minutes for inquiry. And let me start with Mr. Hale.
Mr. Hale, as Corporate Secretary were you responsible for
keeping the minutes at board meetings?
Mr. Hale. That is right.
Mr. Greenwood. Okay. And once a board meeting was over,
what was your process for organizing the minutes?
Mr. Hale. The minutes would be prepared. I would take my
notes for the minutes, handwrite a draft of those minutes. Send
those to Mr. Horton's office. Those would be typed and prepared
by his assistant. Would come back to me. I would review and
send back to Mr. Horton for his review. And then they would be
sent--signed by me and sent to Mr. Scrushy for his approval and
distributed to the board.
Mr. Greenwood. Before I asked this next question, one of
the panel members asked if the board meetings were videotaped
or audiotaped. To your knowledge, were they, Mr. Hale?
Mr. Hale. To my knowledge, no.
Mr. Greenwood. Okay. Mr. Tanner, do you know if the board
meetings were video or audiotaped?
Mr. Tanner. Not to my knowledge, sir.
Mr. Greenwood. Okay. Anyone else have any knowledge with
regard to that? Okay.
Back to you, Mr. Hale. Was Mr. Scrushy given the
opportunity to review the minutes before they were provided to
board members?
Mr. Hale. He was given the opportunity to review the
minutes, yes.
Mr. Greenwood. Before they were given to the board members?
Mr. Hale. Before they were given----
Mr. Greenwood. And why was that?
Mr. Hale. For his signature before they went to the board.
Mr. Greenwood. Did Mr. Scrushy ever make alternations to
the minutes before you provided them to board members?
I do not think your button is on.
Mr. Hale. It was very rare that he would make any changes
or suggestions to the minutes. I remember a couple of
occasions, but that is all.
Mr. Greenwood. Do you remember the substance of those
changes?
Just leave it on.
Mr. Hale. Okay. Sorry. That is a lot easier. Thank you.
Mr. Greenwood. Yes.
Mr. Hale. It was in the August--I think the August 30
meeting of 2000 he added a little clarity with regard to the
Transmittal 1753 statement or the addressing the timeframe of
that. I think the comments, I would need to refer to it to be
certain, but added in there comments that he was advised by Mr.
Owens of Transmittal 1753 on August 6 and referenced the
potential impact initially estimated at $15 to $20 million. It
is not exact words, but something to that effect.
Mr. Greenwood. Did you find it inappropriate that Mr.
Scrushy could edit the minutes at will?
Mr. Hale. He could not edit at will. I mean, that was
something that was stated in the meeting, and I agreed to it. I
mean, if it was not done in the meeting, I would not agree to
adding it. No, sir.
Mr. Greenwood. Okay. So it is your testimony that Mr.
Scrushy never added anything to the minutes that, in fact, did
not reflect what happened at the board meeting?
Mr. Hale. Not the minutes that I prepared, no.
Mr. Greenwood. Nor did he delete anything from minutes that
in fact did occur, words that were spoken?
Mr. Hale. Not to my knowledge.
Mr. Greenwood. Okay. Were you present at the executive
sessions?
Mr. Hale. I was--occasionally I would be asked to stay in
the executive session. Normally I would not be.
Mr. Greenwood. Okay. And were there separate minutes for
the executive sessions?
Mr. Hale. Any--any notations in the minutes from executive
sessions would have been given to me from Mr. Scrushy to add to
the minutes.
Mr. Greenwood. And how would you know if they were, in
fact, accurate?
Mr. Hale. Well, they would be distributed to the board.
Mr. Greenwood. But is it not true that frequently there
were minutes that the board never saw and never reviewed? Never
approved?
Mr. Hale. The minutes were distributed to the board.
Mr. Greenwood. In every instance?
Mr. Hale. The ones I did were distributed, yes.
Mr. Greenwood. Okay.
Mr. Hale. Now there were some toward the final period that
I was taking minutes that were in various stages of drafts and
production. And those certainly might be in question.
Mr. Greenwood. Okay. Would you turn to Tabs 9 and 10 in the
binder on the table? And turn to pages 2, which carries over to
page 3 on Tab 9.
Did you prepare these minutes?
Mr. Hale. Yes, sir. I did.
Mr. Greenwood. Okay. I would like to read a few lines that
begin at the bottom of page 2 and carry over to page 3. ``Mr.
Owens stated that he had believed the Transmittal--'' I believe
that refers to the CMF transmittal about the 1753--``might
apply to the corporation's outpatient services and freestanding
outpatient centers. He informed Mr. Scrushy on August 6 that it
might apply to such services in freestanding outpatient centers
and the impact could be $15 to $20 million.'' Behind these
typed minutes are your handwritten minutes, and that is in Tab
10. Do you see those?
Mr. Hale. Yes, sir.
Mr. Greenwood. Okay. And I note that there are two versions
of the handwritten notes. It looks like an earlier version and
then a more formalized version. Looking at both versions of
your handwritten notes of the meeting on which you base these
minutes, I presume there was no mention of this $15 to $20
million figure? Is that correct?
Mr. Hale. Sir, I remember that figure being mentioned in
the minutes. It is not in my notes. But it was a figure that
was discussed.
Mr. Greenwood. Okay. So it is not in your draft notes?
Mr. Hale. Correct.
Mr. Greenwood. Not in the draft minutes?
Mr. Hale. That's correct.
Mr. Greenwood. But then it appears in the final minutes?
Mr. Hale. That's correct.
Mr. Greenwood. And that was as a result of Mr. Scrushy's
addition?
Mr. Hale. That is correct.
Mr. Greenwood. Okay. Did Mr. Scrushy ask you to put the
figure into the minutes?
Mr. Hale. Yes. The figure was in his addition to the
minutes.
Mr. Greenwood. Okay. So he said to--he reviewed your draft
minutes and then he asked you to add this language about the
$15 to $20 million impact?
Mr. Hale. That is correct.
Mr. Greenwood. And you said I would do that, and you went
back and altered the minutes? Is that correct.
Mr. Hale. The minutes were still in the stage of being put
together, and I made that adjustment because that--I did recall
that being statement in the meeting. Yes.
Mr. Greenwood. Because what?
Mr. Hale. I did recall that being stated----
Mr. Greenwood. You did not?
Mr. Hale. You did recall that being stated.
Mr. Greenwood. Oh, you did recall? So you have an
independent recollection of Mr. Owens stating during this
meeting that he told Mr. Scrushy on August 6 that the impact
could be $15 to $20 million?
Mr. Hale. That is correct.
Mr. Greenwood. Okay. Would you turn to Tab X. I am sorry.
Go back to Tab 10. Okay.
Tab 10 you will find the August 8 board meeting minutes.
Mr. Hale. Tab 10 shows August 26 in my book. It is a
different tab.
Mr. Greenwood. All right. So stay on Tab 10 and go to pages
entitled ``HHEC293-0469''.
Mr. Hale. Okay.
Mr. Greenwood. And do you see about three quarters of the
way down your notes ``Get with WTO and RMS to see what needs to
be added to board minutes.''
Mr. Hale. Yes.
Mr. Greenwood. Okay. Could you tell us what that means to
you?
Mr. Hale. That was after I left, and you see above that you
see that all including me left the board. So that was to go
with them to find out if anything needed to be added to the
minutes.
Mr. Greenwood. So it was your decision to do that or was it
Mr. Scrushy's decision to do that?
Mr. Hale. I asked if there was anything else in executive
session that needed to be incorporated into the minutes.
Mr. Greenwood. Okay. Go to Tab 52, please.
Mr. Hale. Could I add one other thing? If you will see my
note below that where it states continue--discussion continued
and then motion approved with no votes against the motion. That
is what I was advised that actually what occurred after they
went into executive session.
Mr. Greenwood. And you were advised that by whom?
Mr. Hale. By Mr. Scrushy.
Mr. Greenwood. Mr. Scrushy told you that that was what
happened at the executive meeting and so you should put that in
the minutes?
Mr. Hale. That should be included in the minutes. Yes, that
is correct.
Mr. Greenwood. Okay. Is that in your view consistent the
way a secretary should conduct himself to just take the word of
the CEO that something happened at a meeting that you did not
attend and drop it into the notes?
Mr. Hale. If it is noted in executive session that I was
not in, I thought that was appropriate. Yes, sir.
Mr. Greenwood. Okay. Did you ever have any question in your
mind as to whether you should just assume that anything that
Mr. Scrushy told you happened in the executive meeting actually
happened in the executive meeting?
Mr. Hale. I did not question it at that time.
Mr. Greenwood. You did not question that?
Mr. Hale. I certainly would not have.
Mr. Greenwood. All right. Let us go to Tab 52. And do you
see that memorandum?
Mr. Hale. Yes, I do.
Mr. Greenwood. Okay. Why do you not tell us what this memo
indicates?
Mr. Hale. This is a memo----
Mr. Greenwood. This is a memo that you sent, right?
Mr. Hale. Yes. This is a memo, dated March 3, 2003 to Joe
Gordon. It says ``Enclosed please find board minutes for
January 31, 2003, February 6, 2003, February 7, 2003, February
21, 2003. Please review and we will discuss and finalize at the
board meeting in Orlando.
Mr. Greenwood. Okay. So what you did is you sent him the
board minutes for 5 separate meetings and you asked him to
review them and then have discussion with you and finalize at
the board meeting in Orlando, is that right?
Mr. Hale. That is correct.
Mr. Greenwood. Now, is that common practice for you to send
the minutes off to--describe what Mr. Gordon's role was?
Mr. Hale. Mr. Gordon was a director. This memo went to all
the directors. This is just a copy of the one that went to Mr.
Gordon.
Mr. Greenwood. Okay. And why did you feel that it was
appropriate to ask Mr. Gordon specifically to review those
minutes and decide whether they need to be altered or not?
Mr. Hale. Sir, these minutes went to all directors. This
same memo went to each director. This is just a copy of the
memo that went to Mr. Gordon.
Mr. Greenwood. So what was the normal procedure by which
the board would approve minutes?
Mr. Hale. The normal procedure for approval when I was
secretary would be the minutes would be distributed to the
board members and they would sign their--the statement, the
waiver on the back, and that was acknowledgement that they
received. Never was it practice during--from December 1999
while I was the secretary to approve the minutes prior to the
start of the next board meeting. That was not a practice.
Mr. Greenwood. So most meetings have an early on in their
agenda approved the minutes from the last meeting. That was not
the standard practice at HealthSouth?
Mr. Hale. That was not the standard practice. No, sir.
Mr. Greenwood. Okay. We have been informed by board members
from HealthSouth that there are still outstanding minutes from
board meetings that have still never been approved. Is that so?
Mr. Hale. The--in March 2003 I ceased to take minutes for
board meetings. The attorneys from Skadden Arps took over that
responsibility. There were some minutes in stages of drafts and
review with Mr. Horton that were never finalized.
Mr. Greenwood. But I am talking about minutes that were
taken at board meetings when you were still in your role as
secretary and we are told by board members that there were
minutes from meetings that they have never approved that you
took?
Mr. Hale. Yes, sir that is what I said. There were minutes
that were in stages of either my draft form or review of Mr.
Horton that were not finalized prior to that time and still
have not been addressed.
Mr. Greenwood. And what is the normal turn around time for
you? There is a board meeting, you take the minutes, you
draft--you do a draft of the minutes. How long does it take to
get that through the process and approved?
Mr. Hale. That process should not take that long, but that
process was taken away from my hands in March 2003.
Mr. Greenwood. But were there periods of time when before
that, before the date to which you just referred, that minutes
went 5 months without being approved?
Mr. Hale. That sounds long. We were not quick in getting
them back, I will admit that. But I do not know of any that
would be missing.
Mr. Greenwood. Did you ever hear from the board members
complaining that they were unhappy with the fact that minutes
had not been provided to them for approval?
Mr. Hale. Not until after August 2002.
Mr. Greenwood. Okay. My time has expired. The gentlelady
from Colorado is recognized for 10 minutes.
Ms. DeGette. Well, Mr. Hale, before August 2002 how long
was it taking you to get the minutes out to the board members?
Mr. Hale. I do not recall exactly.
Ms. DeGette. At sometimes it was up to almost a year, was
it not?
Mr. Hale. I do not think so, no.
Ms. DeGette. And when you got the draft minutes out to the
board members, like the example here in Tab 52, did you ever
get comments back from executive committee members about things
that were in the minutes that you were not there and----
Mr. Hale. I do not recall any comments.
Ms. DeGette. So you never had anyone say no that was not
right or something else happened, right?
Mr. Hale. Not in the time period prior to that. And the
examples that I remember after August 2003 there was one
comment from Mr. May on clarification of some events in a
meeting that were addressed.
Ms. DeGette. When was that?
Mr. Hale. That was in probably October 2002.
Ms. DeGette. And what was Mr. May talking about?
Mr. Hale. I do not recall specifically. I know there some
confusion in--there was a meeting on October 22 with Fulbright
& Jaworski that I was not in that some Fulbright attorneys were
taking the minutes for that meeting. I do not think those have
ever been completed or seen. I was not in that meeting. It was
strictly executive session. And there was some confusion over
what was presented at the meeting prior to that by Fulbright in
that meeting.
Ms. DeGette. And the subject of that was the auditing, the
financial reporting?
Mr. Hale. The Fulbright report and investigation.
Ms. DeGette. The report. Okay. Thank you.
Mr. Horton, I wanted to ask you some questions. If you can
take a look at Tab 98. That's the compliance policies and
procedures that I was talking to Ms. Cullison about in the last
panel. And I wanted to ask you if you have ever seen these
compliance policies before?
Mr. Horton. I do not recall seeing them before, ma'am.
Ms. DeGette. Now, were you familiar with the protocols of
the Compliance Department for investigating allegations of
fraud?
Mr. Horton. I am not sure--I am not sure what you mean by
the protocols.
Ms. DeGette. Well, did they have a protocol if there was an
allegation of fraud.
Mr. Horton. They had, I think, procedures that they
followed. I am not sure if by protocols you mean a written set
of protocols.
Ms. DeGette. Okay. Well, what were their procedures?
Mr. Horton. My understanding was, I think essentially as
Ms. Cullison said on the previous panel, if they got a call in
on the hotline or any other sort of inquiry, they would sort of
assess the nature of the problem whether it was in fact a
compliance problem or human resources problem, or something
else. Route it down the appropriate path.
Ms. DeGette. Okay. Now, as legal counsel was it your
understanding that you should be contacted immediately if there
were allegations of criminal activity?
Mr. Horton. I would have expected that we would have been.
I do not know that there was a formal policy to that effect.
But the Compliance Department would not infrequently contact
someone in my department, you know, if in view of the
Compliance Department they had an issue come in that----
Ms. DeGette. Let me ask you, was your department--was the
legal counsel's office ever contacted by the Compliance
Department to notify you of an allegation of criminal activity?
Mr. Horton. I do not recall any allegations of criminal
activity.
Ms. DeGette. So, but you were never notified of that.
Now, fraud is potential criminal conduct, is it not?
Mr. Horton. Certainly certain kinds of fraud. Yes, ma'am.
Ms. DeGette. Yes. In fact, you know, as it turns out 15
people have plead guilty to criminal fraud in this resulting
from this company, right?
Mr. Horton. There are 15 people who have plead guilty. Yes,
ma'am.
Ms. DeGette. And that was to a crime, right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. Okay. Now, in 1999 as we heard on the last
panel, Ms. Henze made a compliant to the Compliance Department
that there was fraud going on at the highest levels of
HealthSouth. She said, and she had some credible evidence to
back it up as we heard, that the financial chiefs at
HealthSouth were making improper entries to the books at the
end of each quarter to increase earnings. This is a pretty
serious allegation of criminal activity at a publicly held
company, is it not?
Mr. Horton. Yes, ma'am. It is.
Ms. DeGette. And Ms. Cullison testified that she gave the
complaint to Mr. Tanner, the Compliance Officer, to
investigate. Mr. Tanner has no experience in criminal
investigations and under HealthSouth's protocol I would assume
that he would be required to bring that type of allegation to
you. Would you assume that as well?
Mr. Horton. I am not aware of the protocol that she
describes some of.
Ms. DeGette. Well, would you think that Mr.--that if an
employee came in and said there are serious fraud going on here
and I have the evidence to back it up, would you suspect
someone might have called you?
Mr. Horton. That would certainly be a reasonable thing to
do. Yes, ma'am.
Ms. DeGette. I would think so. Did he bring it to you? Did
he call you and tell you about it?
Mr. Horton. No, ma'am. Not that I recall.
Ms. DeGette. Until Ms. Henze testified in the SEC asset
hearing earlier this year, had you ever heard of this
allegation?
Mr. Horton. No, ma'am. I had not.
Ms. DeGette. Did you hear about these rumors that some of
the witnesses on the second panel talked about that someone was
cooking the books at HealthSouth? Did anyone ever bring that to
your attention?
Mr. Horton. I do not recall any particular rumors that were
brought to my attention. No, ma'am.
Ms. DeGette. Okay. What would you have done if you heard
about those rumors as the legal counsel for the company?
Mr. Horton. Certainly if--you know, if they were rumors
that appeared to have any substance or, you know, provided any
information that would enable them to--enable someone to pursue
them, you know, I would have wanted to find out what was behind
them.
Ms. DeGette. What would have happened if someone would have
brought Ms. Henze's complaint to you?
Mr. Horton. Specifically, I had not thought out a plan of
action. But certainly that would be something we would want to
follow up on and try to get to the bottom of.
Ms. DeGette. Because it is a serious allegation, right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. Now if you will take a look at Tab 67. This is
the Fleeced Shareholder fax that we were talking about in the
last panel. That did come to your attention, as I recall?
Mr. Horton. Yes, ma'am.
Ms. DeGette. Is that correct? And you were asked to look
into it, right?
Mr. Horton. That is correct.
Ms. DeGette. And you had internal audit Mr. Owens write
memos which provided plausible rebuttals, as you described them
to our staff, to these allegations. Is that right?
Mr. Horton. Yes, ma'am. I asked Mr. Owens to look into it
and receive the memos that I think the staff is saying, and I
believe you are saying, from Mr. Owens and from Ms. Sanders
that tended to rebut the allegations.
Ms. DeGette. Did you ever bring this to the attention of
the board or the audit committee?
Mr. Horton. No, ma'am.
Ms. DeGette. Why not?
Mr. Horton. The information that Mr. Owens and Ms. Sanders
provided appeared to me to be credible and to be responsive to
the concerns of--you know, I was not aware of any reason to
take it further than it was taken at the time.
Ms. DeGette. What about Mr. Scrushy? Was he aware of it?
Did you tell him about it?
Mr. Horton. I believe--I am going back in my memory. I
believe he was aware of this communication and--that--and Mr.
Owens and Ms. Sanders were to be looking at the data. But I did
not make a specific report to him.
Ms. DeGette. How do you know that he knew about it then?
Mr. Horton. I am going--and I apologize, because my memory
may not be exact on this. But I have--I have some recollection
of his having been involved at least some of the original
discussion when this came to our attention.
Ms. DeGette. About the----
Mr. Horton. When the original memo came up.
Ms. DeGette. About the allegations that are made in this
email?
Mr. Horton. Yes, ma'am. Again, that--that is the best of my
recollection now. I could not guarantee that he was involved,
but I think he was.
Ms. DeGette. Do you know if Ernst & Young was ever provided
a copy of the memos, the plausible rebuttals?
Mr. Horton. I am not sure.
Ms. DeGette. Now, do you go to the board meetings as legal
counsel?
Mr. Horton. Only when I have been invited to.
Ms. DeGette. How often are you invited?
Mr. Horton. There is really no particular pattern to it. It
would depend on, you know, what was under discussion and
whether Mr. Scrushy, who is chairman and CEO of the board up
until March, you know, wanted me there for some reason.
Ms. DeGette. And would that be for some specific report or
something of that nature?
Mr. Horton. Occasionally during--I mean during the period I
would say 1994 through 1998 or 1999 when the company was in a
heavy acquisition mode, I would normally be at the board
meetings where acquisitions were being approved. Occasionally
there would be some other topic that Mr. Scrushy would want me
to report on, whether it was a piece of litigation or
something. It just really depended on the circumstances.
Ms. DeGette. So there was no requirement, as with many
corporate boards, that legal counsel be present at--that
corporate legal counsel be present at the board meetings,
right?
Mr. Horton. That is correct.
Ms. DeGette. And is that true to this day, do you know?
Mr. Horton. I am not sure that there is any policy
requirement as a practical matter in the meetings of the board
and the special committee of the board of directors that have
occurred since the end of March, there have invariably, as far
as I know----
Ms. DeGette. They have had lawyers there all the time
lately.
Mr. Horton. There are a lot of lawyers.
Ms. DeGette. Lots of lawyers. Yes. I noticed that.
Thanks.
Mr. Walden [presiding]. Thank you. Mr. Horton, I just want
to go back to explain about the Fleeced Shareholder fax so that
I understand it. Ernst & Young received this, right?
Mr. Horton. Yes, sir. That is my understanding.
Mr. Walden. And it raises a whole list of issues from
somebody who obviously had inside information about the
company, or at least it would appear they did. And they came to
you, Ernst & Young came to you and said what should we do about
this. And is it accurate to say then you said we will take care
of it, we will look at it?
Mr. Horton. I am not sure. I do not believe Ernst & Young
originally came to me. I think they originally came to Bill
Owens and Mike Martin, who called me in and we--you know, we
did undertake to look into it.
Mr. Walden. All right. And what was your response back to
Ernst & Young?
Mr. Horton. That we would look into it.
Mr. Walden. So that was it?
Mr. Horton. Subsequently we got the information that we
have discussed from Mr. Owens and Ms. Sanders, and----
Mr. Walden. But are they not the auditors, Ernst & Young,
would you not share that information back to them so they can
do their job?
Mr. Horton. I believe that it was shared with them
ultimately. I mean, in any event, there was no--as far as I
know, no subsequent follow up after that information had been
gathered from Ernst & Young. I never--never heard anything from
them or never had any follow up----
Mr. Walden. Can I clarify. Did you or the others involved,
do you know whether or not that they provided the information,
the answers to these questions from the Fleece Shareholder to
Ernst & Young?
Mr. Horton. It is my impression at this point that the
information was discussed with Ernst & Young. At this point I
just don't recall the details of how that----
Mr. Walden. You do not remember when or how much, or any of
that?
Mr. Horton. No, sir. I apologize. I just do not.
Mr. Walden. All right.
Mr. Goodreau, in the summer of 2002 did Bill Owens, the CFO
of the company, tell you that there were ``big problems with
the numbers, not Enron big, but significant''?
Mr. Goodreau. Sir, it was not in that terminology. What he
said was that--and I believe if you will look at my testimony,
it says that he told me that there was some accounting problems
at the office. And then he said it is not an Enron, but the
number is significant.
Mr. Walden. Okay. Similar to what I have recounted here,
but there are big problems with the numbers, not Enron big but
significant? Is that not what I heard you sort of say?
Mr. Goodreau. Sir, what I just said is exactly what I
remember him saying.
Mr. Walden. All right. When you heard his comments by the
CFO about the numbers of the company, a company you owned stock
in and were an employee of, did you use the compliance hotline
to report what Bill Owens had told you?
Mr. Goodreau. No, sir, because I had no reason or any
documentation to prove that what he was saying was criminal.
Mr. Walden. So even though he told you there are numbers
and problems and raises the word ``Enron'', and he is the CFO,
that did not cause concern enough to do anything about it?
Mr. Goodreau. For all I knew, sir, he was talking about
problems in accounting in a certain division. I had no idea
that he was talking about anything other than that.
Mr. Walden. But you did have a hotline card like other
employees had?
Mr. Goodreau. Yes, sir. I had a hotline card.
Mr. Walden. Okay. But you did not use it? You did not think
that what he said was enough to trigger that?
Mr. Goodreau. No, sir.
Mr. Walden. Okay. Did you witness Mr. Scrushy use a
computer at his Merrian offices located on the premises of his
home in Birmingham prior to March 2003?
Mr. Goodreau. I do not remember him ever using a computer
there.
Mr. Walden. Did you not tell our staff, our investigators,
that he had a laptop computer there?
Mr. Goodreau. He had a laptop computer there, but I do not
recall him every using it. I remember it sitting on the
counter, but I never saw him use it.
Mr. Walden. Okay. Did you ever investigate or hire an
outside firm to investigate any HealthSouth board members?
Mr. Goodreau. No, sir. I did not.
Mr. Walden. Did Mr. Scrushy ever ask you to investigate or
hire a third party to investigate board members?
Mr. Goodreau. I did not hire any outside person to
investigate a board member.
Ms. DeGette. Did you ever investigate a board member?
Mr. Goodreau. I did.
Mr. Walden. Okay. That was part of my question. Who was it?
Can you tell us about it?
Mr. Goodreau. Mr. May.
Mr. Walden. And what was the issue and who asked you to
investigate?
Mr. Goodreau. I do not remember exactly that I was asked to
investigate Mr. May. I looked into Mr. May because I thought
that he had been dishonest.
Mr. Walden. In what respect?
Mr. Goodreau. Mr. May had been involved in the bankruptcy
of a couple of companies, and I did not remember ever hearing
that from Mr. Scrushy.
Mr. Walden. Were these----
Mr. Goodreau. I asked him about it, and he did not know
about it.
Mr. Walden. Mr. Scrushy did not know about it?
Mr. Goodreau. No, sir.
Mr. Walden. And were these companies with some relationship
with HealthSouth?
Mr. Goodreau. I do not think they had any relationship with
HealthSouth.
Mr. Walden. Okay. Did you report to Mr. Scrushy about the
investigation or what you found out?
Mr. Goodreau. Yes, sir. I told him that--that--actually
what I did, was I asked him if he knew about that. And he said
no, he did not know about that. And then I think he confronted
Mr. May about it.
Mr. Walden. Could you turn to Tab 58? And can you tell us
who is Joel that Mr. Scrushy is referring to? I will let you
get to that tab, sir. Do you know is he referring to Joel
Gordon, a long time board member?
Mr. Goodreau. Yes, sir. He is.
Mr. Walden. And why is he asking you to follow Mr. Gordon?
It says: ``Subject: Re: Come to the first floor. Hang out with
Mary and follow Joel as he goes in and out. See what he is
doing. RS.'' From Richard Scrushy. And you responded. ``Okay.
Jim Goodreau.''
Mr. Goodreau. Yes, sir.
Mr. Walden. Do you know why he was asking you to follow Mr.
Gordon?
Mr. Goodreau. I do not know why he was asking me to follow
him.
Mr. Walden. You never asked him that?
Mr. Goodreau. No, sir. I never----
Mr. Walden. You just did whatever he told you to do and--
what did you find out after following Mr. Gordon?
Mr. Goodreau. He was just coming out of the--I think they
were in a board meeting or something, and he--Mr. Gordon came
out of the board meeting. But, I mean, he stayed on the 5th
floor. He did not go anywhere.
Mr. Walden. Is that--I mean, I--I have been on a couple of
boards. And I have never run into where the CEO has a security
person follow us in and out of the bathroom, or wherever they
go as board members. Is that pretty typical at HealthSouth?
Mr. Goodreau. No, sir. That was the only time I believe I
was ever asked.
Mr. Walden. And you never inquired as to why?
Mr. Goodreau. No, sir.
Mr. Walden. Did you report? Did Mr. Gordon know he was
being followed? Did he ask you about that?
Mr. Goodreau. I have no idea if he knew or not. It was not
like I was following him around the--following him around the
room.
Mr. Walden. All right. Did you ever hire an investigation
company by Les Moore and investigate any board members?
Mr. Goodreau. I hired an investigative company, yes. But as
to whether to investigate any board members, I have--I have no
idea.
Mr. Walden. Did Mr. Scrushy authorize you to hire outside
investigators?
Mr. Goodreau. I did not ask Mr. Scrushy about hiring
outside investigators.
Mr. Walden. Who was paying the bills for the outside
investigators?
Mr. Goodreau. The company.
Mr. Walden. Okay. But Mr. Scrushy did not--you are telling
me under oath Mr. Scrushy never asked you to hire these
investigators? You did them on your own?
Mr. Goodreau. Yes, sir.
Mr. Walden. But sent the bill back, obviously, or it came
out of your department?
Mr. Goodreau. Actually, Bill Owens signed off on the bills.
Mr. Walden. Bill Owens. And Bill Owens worked for Mr.
Scrushy, right?
Mr. Goodreau. That is correct.
Mr. Walden. Okay. And what were they investigating, this
company you hired, Les Moore?
Mr. Goodreau. The company would investigate whatever it was
that needed to be investigated by the corporation----
Mr. Walden. All right. But specifically in this case why
did you hire them?
Mr. Goodreau. With the board?
Mr. Walden. Yes.
Mr. Goodreau. Is that what you are asking me?
Mr. Walden. Yes.
Mr. Goodreau. Again, I would have to look and see. Because
I am not exactly clear on what specifically you are asking
about.
Mr. Walden. Okay. Let us get specific. Les Moore. That is a
security guard, right, that works for you?
Mr. Goodreau. He has a company.
Mr. Walden. He has a company?
Mr. Goodreau. Yes.
Mr. Walden. And you hired him and that company?
Mr. Goodreau. I had hired that company prior to him
becoming an employee.
Mr. Walden. Okay. And why did you hire that company? What
was their mission? What did you ask them to look at?
Mr. Goodreau. Whenever we had any type of investigative
needs within HealthSouth that required the use of outside
investigators----
Mr. Walden. So, would that be to investigate people inside
HealthSouth?
Mr. Goodreau. Not specifically. No, sir. It might be to
investigate----
Mr. Walden. But you are not going to tell me specifically
why you hired these people and what you asked them to look at?
Mr. Goodreau. Excuse me, sir?
Mr. Walden. Are you going to tell me specifically why you
hired this company and what you asked them to look at? I mean,
that is what I am asking is specifically why did you hire them
and what did you ask them to look at? What other kinds of needs
were there at HealthSouth, investigative needs?
Mr. Goodreau. We had investigative needs for looking into
whatever. We have 50,000 employees, we see 100,000----
Mr. Walden. So you were looking at different employees and
what they were doing?
Mr. Goodreau. No, sir. I was not looking at different
employees and what they were doing.
Mr. Walden. Okay.
Mr. Goodreau. There was an allegation that came up about a
situation where an employee had a problem with someone or had a
confrontation with someone, or someone came into a facility
to--made some threat, or if we received a letter from someone
stating a threat, that we were to investigate that to see what
merit it would hold.
Mr. Walden. So how many investigations did you undertake?
Mr. Goodreau. I cannot recall exactly.
Mr. Walden. Can you give me a range? Ten, 100, 5,000?
Mr. Goodreau. Over a 7 year period, 50 maybe. I do not
know.
Mr. Walden. And did any of those involve board members?
Mr. Goodreau. Only the one that I can recall with Mr. May.
Ms. DeGette. Will the gentleman yield?
Mr. Walden. Certainly.
Ms. DeGette. Did you keep records of those investigations,
Mr. Goodreau?
Mr. Goodreau. Not specifically. If we had records of
anything, it would be retained until the investigation was over
and then we would get rid of it. We had no reason to keep it.
Ms. DeGette. So as far as you know, any of the
investigations as you described if someone came into a facility
or if there was some other issue, you would have no record of
that if that was closed at this point?
Mr. Goodreau. There may be a record of that if it was on
our--we had a reporting system inside the corporate security
that kept with the majority of that. It may or may not be on
that system.
Ms. DeGette. And what you are saying is not every
investigation would have had a record?
Mr. Goodreau. No, ma'am.
Ms. DeGette. Thank you.
Thank you, Mr. Chair.
Mr. Walden. Did your investigators or yourself, were you
armed running around HealthSouth?
Mr. Goodreau. There were only probably four guys that were
armed at--or allowed to carry a side arm. They were all
trained. And not everyone would be armed at the same time.
Mr. Walden. Okay. And were you one of those four?
Mr. Goodreau. I was.
Mr. Walden. Okay. Did you carry a side arm at all times?
Mr. Goodreau. I carried a side arm.
Mr. Walden. Yes.
I am curious about how extensive this video system was,
because it seemed some of our witnesses were sort of shocked
and intimidated to find out it existed. Was it throughout the
5th floor?
Mr. Goodreau. The camera system?
Mr. Walden. Yes.
Mr. Goodreau. No, sir. The camera system is mainly in the
traffic hallways and high traffic areas of the----
Mr. Walden. Is it in the conference room sort of places?
Mr. Goodreau. In--no, sir. It is not in any conference
room.
Mr. Walden. Okay.
Mr. Goodreau. There may be some cameras in the back hallway
of the conference center, but there is not any in the
conference room.
Mr. Walden. In those--did this system record what
transpired? Would you keep tapes?
Mr. Goodreau. It did not record audio. It only recorded
video. And we kept the tapes for a specific period of time. I
cannot remember if it was 30 days or 60 days exactly. And then
the tapes would just be simply rotated back through.
Mr. Walden. And after the company came under various
investigations, were those tapes then preserved as part of
potential evidence or were they required to be preserved?
Mr. Goodreau. There was no directive to me to preserve any
tapes. However, there was no change in the normal way we
operated. We continued to do what we normally do.
Mr. Walden. Okay.
At this point we are going to recess the committee for
about 5 minutes. And then we will return. So if you could stay,
we would appreciate it.
And the committee is in recess.
[Brief recess.]
Mr. Greenwood. The meeting will come to order. And I thank
the witnesses for their patience.
And the Chair recognizes for 10 minutes the gentleman from
Florida, Mr. Stearns for inquiry.
Mr. Stearns. Thank you, Mr. Chairman.
And I appreciate your patience here as we recessed and we
return here.
Mr. Tanner, I guess you were involved with the founding of
this corporation?
Mr. Tanner. Yes, sir.
Mr. Stearns. And how big was the company when you started
it?
Mr. Tanner. We had one office with just 5 men when we
started the company in 1984.
Mr. Stearns. Not too long ago. And now how many employees
does HealthSouth have?
Mr. Tanner. I do not know what they have now. I left the
company in 1999.
Mr. Stearns. Okay. Okay. And tell me again why you left the
company.
Mr. Tanner. I retired. My health was getting to the point
where I did not want to take a chance on where I would be in
the future. And I decided to let me retire now and see the
world.
Mr. Stearns. Were you involved with the Compliance
Department at HealthSouth?
Mr. Tanner. Yes, sir.
Mr. Stearns. Okay. And what was your position in that
department?
Mr. Tanner. The board made me Corporate Compliance Officer.
Mr. Stearns. And your responsibilities included what?
Mr. Tanner. I was the Corporate Compliance Officer. The
Compliance Department reported up to me to the board committee
on corporate compliance.
Mr. Stearns. And why did HealthSouth start a Compliance
Department? Because they felt it was needed, right?
Mr. Tanner. It was started as a response to a presentation
that Mr. Kusserow and Ernst & Young made following the National
Medical Enterprise----
Mr. Stearns. So Ms. Cullison claimed that she brought a
very serious charge, potential accounting fraud, to your
attention as head of the Compliance Department in 1999, and
that is the year you retired?
Mr. Tanner. Yes, sir.
Mr. Stearns. Okay. She brought to your attention a serious
charge. She also claimed that you advised her that you would
take care of the investigation yourself. Do you recall that?
Mr. Tanner. No, sir, I do not. I have no recollection of
that.
Mr. Stearns. So you have no recollection of her bringing a
very serious charge, a potential accounting fraud to your
attention, to the Compliance Department in 1999?
Mr. Tanner. I do not remember a lot of 1999, sir. And that
is one reason why I also retired.
Mr. Stearns. So you do not recall the information, so
obviously you do not know what she did with it?
Mr. Tanner. That is correct, sir.
Mr. Stearns. Have you heard anything about what she
claimed?
Mr. Tanner. Just in what she said here earlier and what was
said----
Mr. Stearns. Was that a total surprise to you?
Mr. Tanner. No. It had been reported to me when I was
subpoenaed at the SEC hearing.
Mr. Stearns. Okay. And you heard about this information
after you retired, not before? Is that what your sworn
testimony is, that you did not hear about this information
while you were an employee of HealthSouth Corporation?
Mr. Tanner. I do not recollect----
Mr. Stearns. ``Recollect'' is a sort of vague term. Do you
or do you not remember----
Mr. Tanner. I do not remember, sir, what she said she told
me.
Mr. Stearns. Do you remember her coming in and talking to
you?
Mr. Tanner. I do not remember that, sir. No.
Mr. Stearns. Do you remember her ever showing up in your
office or calling you on the phone? I mean, if I go back and
look at telephone records, will I find that she called you
ever?
Mr. Tanner. I am sure since she reported to me, we spoke. I
am sure that we had conversations. I cannot say what the
substance of those conversations were. I do not remember
things.
Mr. Stearns. So you talked to her because she is one of
your employees, but you never remember her talking specifically
about this serious charge potential accounting fraud? That is
your----
Mr. Tanner. No, sir. I do not remember.
Mr. Stearns. Okay. Okay. But you talked to her regularly on
the phone and in person about other things?
Mr. Tanner. I am--I am sure we spoke. I am sure we have had
conversations. How many, what they were, I cannot tell you,
sir, because I do not remember.
Mr. Stearns. Okay. Do you perform when people come to you
with complaints, do you perform actual investigations on these
allegations? Have you ever done that in your position as
Compliance Department head? Had you ever taken initiative to
investigate any actual allegations?
Mr. Tanner. The way the Compliance Department was
established, she would do the work. She would do the
investigations and using the resources that the Compliance
Department had, either a audit or----
Mr. Stearns. So she--Cullison did the research for you? And
did she ever tell you that she was investigating any serious
charges of potential problems? Forget accounting fraud. But had
she done any investigation into anything as your employee which
would involve an investigation of allegations?
Mr. Tanner. I received the statistics of activities that
the compliance report did that I passed on to the board.
Mr. Stearns. Okay.
Mr. Tanner. I do not remember----
Mr. Stearns. You never physically talked to her about any
allegations that she was investigating?
Mr. Tanner. I do not remember----
Mr. Stearns. Just yes or no.
Mr. Tanner. No, sir. I do not.
Mr. Stearns. Okay. Does the Compliance Department have a
contact in the legal department of HealthSouth?
Mr. Tanner. I think----
Mr. Stearns. Just yes or no.
Mr. Tanner. I do not remember.
Mr. Stearns. Well, this is procedural. This is a policy
position. You are in charge of something. This is not something
that you remember or not. This is actual procedure. Did you
have a procedure in the Compliance Department where you had
contact with the legal department. I think the obvious answer
you must have. I mean, if you are going to have a Compliance
Department, you have got to be able to--just like Congressmen,
we have an ethics. So we know we can go to the Ethnics
Committee anytime we have a problem to find out whether we are
doing something wrong. So I assume that the Compliance
Department would have some contact with the legal department at
HealthSouth. And you are saying you do not recollect or you do
not know. It seemed to me you had to. That would be part of the
police procedure. Am I wrong?
Mr. Tanner. I do not----
Mr. Stearns. Because you understand, you got to operate in
a legal framework----
Mr. Tanner. Sir----
Mr. Stearns. You have to have contact with legal.
Mr. Tanner. [continuing] The compliance program was
established in response to a presentation. I recall attorneys
from legal department present at that initial meeting.
Mr. Stearns. So if I go back to the Compliance Department
today and ask them, the new head, do you have any contact with
the legal department, he will say yes? He or she will say yes,
do you not think? Just off----
Mr. Tanner. I do not know.
Mr. Stearns. Okay.
Mr. Tanner. I am not there, sir.
Mr. Stearns. Okay. Let me continue to ask----
Mr. Tanner. I retired in 1999.
Mr. Stearns. How would a Compliance Department employee
know that a complaint was serious enough to be forwarded to the
legal department or even outside authorities? Under your
scenario, you do not even have any contact with the legal
department. So answer me this: How you as head of the
Compliance Department would know if your complying with the
legal department? Is that not of the Compliance Department's
responsibility to comply with legalities? I mean, you are
telling me that you have no recollection if you had any contact
with the legal department, yet at the same time do you not want
to comply with the law or even outside authorities? There is
something not ticking here.
Mr. Tanner. Sir, if I could remember, I would be happy to
tell you. I do not remember.
Mr. Stearns. You draw a blank?
Mr. Tanner. Yes, sir. That is one reason why I am no longer
working and I have no activity in terms of everyday work
because my cognitive functions have been impaired.
Mr. Stearns. Okay. I respect that. I respect that. I
understand. Understand.
But you understand my question?
Mr. Tanner. Yes, sir. I understand your question.
Mr. Stearns. Okay. And you understand, just take off your
hat and you and I just talking in the lobby out here, we would
say, you are head of the Compliance Department. You should have
contact with the legal department to know what you are doing is
correct. Does that not seem to make sense? We are not talking
about back in 1999. We are just talking in general straight
common sense that if you are head of the Compliance Department,
you want to be in touch with the legal department to make sure
you obey the law. Does that not make sense? I am just trying to
get you to commit common sense here what we are talking about.
Not asking you to go back in your memory. Just to say--sir?
Mr. Tanner. Yes.
Mr. Stearns. Okay. That is all I want. Okay.
You know, I am not making any judgments here. I am just
talking. So, I mean, you are certainly entitled. And so I do
not mean to imply you are not entitled here. Because, God
bless, you know, everybody goes through his ups and down here.
So it is our understanding that the Compliance Department
policy was to purge all closed complaint materials after 90
days. Is this a policy that you understood when you were head
of it?
Mr. Tanner. When I was interviewed by the counsel, they
showed me the--they made a reference to the purging. And I was
surprised, because I did not----
Mr. Stearns. You do not remember that policy?
Mr. Tanner. I do not remember that and I was shocked that
it was--said that it was--they were shredded, and I did not
have any knowledge.
Mr. Stearns. And you do not have any idea when--they
actually then showed you this policy, right, to purge it, in 90
days, they showed you the policy, right? And you were
surprised?
Mr. Tanner. They showed me a spreadsheet, I think it was.
Mr. Stearns. Right. Yes.
Mr. Tanner. And it said it was a category purged. And it
was----
Mr. Stearns. Okay. Okay. Do you have any idea who wrote
that policy to purge in 90 days?
Mr. Tanner. No, sir.
Mr. Stearns. Okay. Okay. Well, thank you for answering my
questions.
And, Mr. Chairman, I yield back my time.
Mr. Walden. Thank you.
The Chair recognizes the gentle woman from Colorado.
Ms. DeGette. I just have--thank you.
Mr. Tanner, if you can take a look at Tab 98. This is the
now infamous compliance policies that I have been talking
about.
Mr. Tanner. Yes, ma'am.
Ms. DeGette. It was sent to Ms. Cullison, but there is a cc
to you. Do you remember receiving these compliance policies?
Mr. Tanner. I do not remember. I probably did because my
name is cc'd on it. Yes, ma'am.
Ms. DeGette. Do you recall whether these or any compliance
policies were adopted?
Mr. Tanner. I do not recall.
Ms. DeGette. Did the company have any compliance policies
when you were the Compliance Officer?
Mr. Tanner. We had the compliance program and the structure
laid out. There was a book, a training program and that type of
thing that laid out what was to be done.
Ms. DeGette. So there was a procedure in place, you are
just not sure if it is this one?
Mr. Tanner. Yes, I can't--I do not say it is this format or
not.
Ms. DeGette. Would it be your recollection as the former
Compliance Officer of the company that when there were
allegations of violations of criminal law that legal counsel
would be consulted?
Mr. Tanner. I would assume that it would happen, okay. I
cannot say it did or did not. But I would assume that would
happen.
Ms. DeGette. That would be a logical inference to make?
Mr. Tanner. Yes, ma'am.
Ms. DeGette. And if that were the policy, you would not be
surprised, right?
Mr. Tanner. Yes, ma'am.
Ms. DeGette. Do you recall ever contacting legal counsel
about allegations of violations of criminal law yourself when
you were Compliance Officer?
Mr. Tanner. No, ma'am. I do not.
Ms. DeGette. Okay. Thank you.
I wanted to ask you, Mr. Goodreau, if you--yesterday the
``The Wall Street Journal'' had an article, and it talked about
Mr. Scrushy having wired his truck and taping a woman without
her knowledge considering allegations of various sundry extra
marital affairs that were made while she was in the truck. And
I was wondering if you had any knowledge of the truck and its
taping system?
Mr. Goodreau. Other than he used a tape recorder.
Ms. DeGette. Did you have a knowledge of that at the time?
Mr. Goodreau. I know that he used a tape recorder.
Ms. DeGette. In his truck?
Mr. Goodreau. Yes, ma'am.
Ms. DeGette. How do you know that?
Mr. Goodreau. Because he told me.
Ms. DeGette. At the time?
Mr. Goodreau. That--of the taping.
Ms. DeGette. Now, of what taping?
Mr. Goodreau. Of this conversation that you are speaking
of.
Ms. DeGette. Did he tell you he taped any other
conversations in the truck?
Mr. Goodreau. No, ma'am.
Ms. DeGette. Did he tell you why he taped the conversation?
Mr. Goodreau. No, ma'am.
Ms. DeGette. He just said I taped a conversation in the
truck, and that was it?
Mr. Goodreau. No, ma'am. He said he taped the conversation
with Amy Krumpton.
Ms. DeGette. Did he say why he did that?
Mr. Goodreau. No, ma'am.
Ms. DeGette. He just walked up to you and said I taped this
conversation? That was the end of your conversation with him?
Mr. Goodreau. No, ma'am. That she had information that was
going to shed some light on his particular situation and the
situation that involved Hope Lanius and Bill Massy.
Ms. DeGette. I am sorry. The situation that involved what?
Mr. Goodreau. Hope Lanius and Bill Massy.
Ms. DeGette. Thank you.
Did Mr. Scrushy often talk to you about taping
conversations?
Mr. Goodreau. No, ma'am.
Ms. DeGette. How many times did he?
Mr. Goodreau. That's the only--that's the only conversation
I ever had with him about it.
Ms. DeGette. Did you ever wire or arrange to have wired any
of Mr. Scrushy's homes, offices, vehicles or any other location
he might be?
Mr. Goodreau. When you mean--when you say ``wire''?
Ms. DeGette. Yes. Taping systems.
Mr. Goodreau. Maybe a surveillance system at this house or
something of that nature, but not anything in any car or
anything like that.
Ms. DeGette. Now, the surveillance system at his home, when
was that installed?
Mr. Goodreau. There has been a few modifications to that
surveillance system throughout the time I have been there.
Ms. DeGette. And when have you been there? I am sorry?
Mr. Goodreau. In the last 7 years, ma'am.
Ms. DeGette. And were you in charge of making those
modifications?
Mr. Goodreau. Usually. Yes, ma'am.
Ms. DeGette. And what were those modifications?
Mr. Goodreau. Typically it might be an upgrade to a system
or an upgrade to a camera or something.
Ms. DeGette. Does he have cameras throughout his
properties?
Mr. Goodreau. No, ma'am. Just at his home in Birmingham.
Ms. DeGette. At his home in Birmingham.
Mr. Goodreau. Yes, ma'am.
Ms. DeGette. So that is where you are saying you made
modifications, it was to the system to his home in Birmingham?
Mr. Goodreau. Yes, ma'am.
Ms. DeGette. Did that involve cameras throughout the
property?
Mr. Goodreau. Sometimes it might, and sometimes it would
not. It just----
Ms. DeGette. Did it involve audiotaping?
Mr. Goodreau. No audiotaping.
Ms. DeGette. Okay. Now, we heard about Mr. Watkins. Were
there any other times that Mr. Scrushy had you investigate
members of the board of HealthSouth?
Mr. Goodreau. About Mr. Watkins?
Ms. DeGette. I'm sorry. It was Mr. May.
Mr. Goodreau. Yes, ma'am.
Ms. DeGette. Were there any others?
Mr. Goodreau. No, ma'am. Not that I remember.
Ms. DeGette. And you testified earlier this year in
district court that Bill Owens told you in the fall of 2002
about fraud that was going on at HealthSouth. Did you tell Mr.
Scrushy about this?
Mr. Goodreau. No, ma'am.
Ms. DeGette. Why not?
Mr. Goodreau. Well, first of all, Mr. Owens did not tell me
about fraud that was going on at HealthSouth.
Ms. DeGette. What did he tell you?
Mr. Goodreau. He told me that there were some accounting
problems at the office. But I did not know if he was talking
about a particular division or not. I was close to him, he was
my friend. And he was confiding in me.
Ms. DeGette. And so you did not tell Mr. Scrushy?
Mr. Goodreau. I did not think there was a need to tell Mr.
Scrushy. I told Mr. Owens he needed to talk to Mr. Scrushy. I
was a security guy. I thought maybe that was something that
ought to be handled on that level of management. Certainly not
from my perspective.
Ms. DeGette. Did Mr. Owens tell you the extent of the
accounting problems?
Mr. Goodreau. No, ma'am. What he told me was just what I
said.
Ms. DeGette. That there were----
Mr. Goodreau. There were some accounting problems, that is
all he said.
Ms. DeGette. Okay. Did you know that the board wanted to
fire Mr. Owens in late 2002? Did Mr. Owens confide that in you?
Mr. Goodreau. I do not know that Mr. Owens confided that in
me. I want to say I believe I heard Mr. Scrushy say that, but I
am not positive. I know that it was--I know that I have heard
that, but I just honestly cannot remember.
Ms. DeGette. Do you know that Mr. Scrushy actually
persuaded the board not to fire Mr. Owens?
Mr. Goodreau. I have heard that, too. I do not----
Ms. DeGette. Who did----
Mr. Goodreau. I cannot remember specific conversations. It
seems that I heard--I cannot remember exactly who I heard it
from. But I did hear that he went to bat for Bill to keep his
job.
Ms. DeGette. But it is your testimony today that you never
told Mr. Scrushy about what Mr. Owens had told you about the
accounting problems?
Mr. Goodreau. Yes, ma'am. That is absolutely correct.
Ms. DeGette. Okay.
Mr. Walden. Would the gentle woman yield?
Ms. DeGette. Sure. Be happy to yield.
Mr. Walden. Because I would like to follow up on that
point. Because there is something here that just does not add
up. Because Mr. Owens tells you that there is a problem with
the accounting. I think you told me the words were something
like we got some problems in accounting, not as big as Enron,
but something to that effect. We could go back and get your
exact words.
But you did not ask any questions of Mr. Owens after that?
I am amazed these people come and just spill their heart to you
in little bits and you do not ask the next question. Did you
ask Mr. Owens any questions about the accounting? Not one word,
not one question? If we brought him up here under oath----
Mr. Goodreau. I asked--I asked him did he--did Mr. Scrushy
know about it. And he said no. And I said you need to tell him,
Bill. This is exactly what I said.
Mr. Walden. Okay. And you never said anything to Mr.
Scrushy?
Mr. Goodreau. No, sir. I never did.
Mr. Walden. In a given day, how much time did you spend
with Mr. Scrushy?
Mr. Goodreau. A great portion of the day.
Mr. Walden. And this is a man who will tell you he secretly
tape recorded somebody in his pick-up. And you are the security
person that investigates whatever is going on in the company.
And you are the security person who has been tasked to watch
board members coming in and out of a board meeting or a board
member coming and out of a board meeting, you are the security
person who hires third party security firms to look at
different things. Security is on your mind and yet you do not
ever say anything to a guy you are with virtually all the time
every day that there is some sort of accounting problems and
did Owens ever tell you about it? You never said anything to
Mr. Scrushy about it?
Mr. Goodreau. I never said anything to him, sir, no.
Mr. Walden. Did you say it to anybody in the company?
Mr. Goodreau. I said it to Les Moore that works with me.
Mr. Walden. I'm sorry, to whom?
Mr. Goodreau. I said to the gentleman that works with me.
Mr. Walden. Another security person?
Mr. Goodreau. Yes, sir. And--and----
Mr. Walden. What did you tell him?
Mr. Goodreau. Sir?
Mr. Walden. What did you tell him?
Mr. Goodreau. The same thing I just told you. That--that I
met with Bill Owens last night and Bill said there was some
accounting problems at the office. And I told him to--I asked
him did he talk to Richard, and he--or did Richard know, and he
said no. And I said well you need to tell him.
Mr. Walden. What prompted your meeting with Mr. Owens?
Mr. Goodreau. He called me to talk to me.
Mr. Walden. About what subjects?
Mr. Goodreau. I do not know. Bill and I were friends. But
he called and wanted me to--to----
Mr. Walden. Would you say this is the principal subject?
Mr. Goodreau. Excuse me, sir?
Mr. Walden. Would you say that this revolution of
accounting problems at HealthSouth was the principal topic of
your conversation? Was it a day or night or----
Mr. Goodreau. It was in the evening. Probably, I do not
know, 7, 8. But I do not know that that----
Mr. Walden. Were you usually there that late at night?
Mr. Goodreau. Where?
Mr. Walden. Wherever you had--where did this meeting take
place?
Mr. Goodreau. It was a Mexican restaurant, On The Border,
in Birmingham.
Mr. Walden. Okay. So he called you to come to a Mexican
restaurant?
Mr. Goodreau. I do not remember exactly what he said, but
it was something to the effect of meet at On The Border. You
know, go and meet at On The Border.
Mr. Walden. Okay. And so he calls, says meet me On The
Border. You do not remember anything else you talked about, but
you did talk about----
Mr. Goodreau. I am sure we probably talked about his--his
family situation and things like that that he and I would
typically talk about.
Mr. Walden. Okay. But in the course of that conversation he
said there were some accounting problems?
Mr. Goodreau. Well, I could tell he had something on his
mind, but I did not know what it was.
Mr. Walden. Okay. Did you think there were any problems
with the approval process for board minutes?
Mr. Horton, let us go to you. I am sorry.
Ms. DeGette. Excuse me.
Mr. Walden. Oh, I am sorry.
Ms. DeGette. I yield back all the time I have left.
Mr. Greenwood. The gentlelady's time has expired.
Mr. Walden. I would yield her some if----
Ms. DeGette. That is okay.
Mr. Greenwood. That is quite all right. Neither of you have
anything to yield at this point.
The Chair recognizes himself for 10 minutes.
Mr. Walden. Oh, okay.
Mr. Greenwood. And, Mr. Hale, I want to go back to a line
of questioning that I had with you earlier. And I want to put
this thing in its entire consequence. Okay.
The reason that this congressional committee is holding
this hearing is because in my district and every State in the
union retirees, among others, invested in HealthSouth because
they were led to believe that HealthSouth was a vibrant growing
company, it was meeting its Wall Street expectations. People
all over the country put their hard earned earnings into this
company to help pay for--to put money away and let it grow for
their children's education. Investors believed in this company.
What we know is that at some point, for a number of
reasons, the stock dropped and it dropped precipitously. We
also know that Mr. Scrushy sold 75 percent of his stock by, I
think, July 31, 2002. Okay.
What we are interested in, what the SEC is interested in,
what the Justice Department is interested in is whether or not
Mr. Scrushy, among other things, sold his stock when he did
because he understood that there was going to be a major
financial impact to this company because in essence it had
gotten the word from the Medicare program, from CMS, that it
was wildly overbilling Medicare and charging individual rates
for group rates for group therapy.
So it is important for us to understand when it was that
Mr. Scrushy, what did Mr. Scrushy know about that impact and
when he knew it.
The logical thing for us to do is to go to the board
meetings to find out when at those board meetings there was a
discussion about this so you can put that into a chronology.
Okay.
Now, having put that in context, and I would like you to go
again back to Tab 9 and Tab 10 from your notebook. Now in Tab
9, which are the minutes from the August 26, 2002 board
meeting--you with me?
Mr. Hale. Yes, sir.
Mr. Greenwood. Okay. And you included in those--you are the
secretary, you are in charge of the minutes. And you wrote in
those minutes the sentence that says ``He informed Mr. Scrushy
on August 6 that it might apply''--this is in reference to this
new directive out of CMS about billing--``that it might apply
to such services in freestanding outpatient centers and the
impact could be $15 million to $20 million. Mr. Scrushy stated
that he had advised Mr. McVay and subsequently Mr. Owens to go
back to CMS for better clarification.'' All right?
Now, are those the words that in fact were not in your
draft minutes that you added at Mr. Scrushy's direction?
Mr. Hale. I believe so. Yes, sir.
Mr. Greenwood. Pardon me?
Mr. Hale. I believe so. Yes, sir.
Mr. Greenwood. Okay. So you took notes at the meeting.
They're in Tab 10. None of those words are in your notes. But
you added them into the minutes after Mr. Scrushy told you to?
Right?
Mr. Hale. Let me check with my notes and make sure that--
what that--if I could, sir, refer back to the notes on the
August 8 meeting.
Mr. Greenwood. Sure. Yes.
Mr. Hale. Do you know which tab? Could you lead me to
those, please?
Mr. Greenwood. Oh, you want to know where they are? If you
look in Tab 10 and you look at the page--let's see here. That's
a board of director's minutes in your handwriting, 8/26/02. And
I think the relevant language is on the page that is labeled
293-0467 having to do with timeline of CMS transmittal.
Mr. Hale. Yes. I am trying to find the notes on the August
8 meeting.
Mr. Greenwood. Oh. That is on Tab 9. It is on the third
page of that document at the very top. It says ``He informed
Mr. Scrushy,'' and this is--are you with me now?
Mr. Hale. I am with you on the August 26 minutes. Yes, sir.
I am looking for the notes----
Mr. Greenwood. All right. Let's start at page----
Mr. Hale. [continuing] of the August 8 meeting.
Mr. Greenwood. Okay. Go to Tab 8. Are you looking for the
words that I quoted in the official?
Mr. Hale. Yes. I wanted to reference my notes on the August
8 meeting.
Mr. Greenwood. Okay. That is Tab 8. Okay. And it says
``discussion of CMS transmittal''--this is on the fourth page
of that document at the very bottom.
Mr. Hale. Okay. The--I believe what referenced back to the
August 26, what was added by Mr. Scrushy was the sentence ``He
informed Mr. Scrushy,'' and this was Mr. Owens going, again,
through the timeline. And the timeline it stated ``He informed
Mr. Scrushy on August 6 that it might apply to such services
and freestanding outpatient centers, and the impact could be
$15 to $20 million.'' The--if you reference back the August 8
board minutes, my notes, which is 388-0445.
Mr. Greenwood. Yes.
Mr. Hale. Actually I make a notation here that with the
discussion of the timeline of the transmittal letter, that
the--they advised and the board concurred that management
should meet again with CMS to assess--to get additional
clarification. So that was in that part of it as far as the
reference to go back, that is where that came from.
Mr. Greenwood. Okay. Now, you did add that sentence, ``He
informed Mr. Scrushy'' all the way up to $15 to $20 million,
you added that line at Mr. Scrushy's request, correct?
Mr. Hale. Yes, sir.
Mr. Greenwood. Okay.
Mr. Hale. He wanted additional clarification on the
timeline.
Mr. Greenwood. Got it.
Mr. Hale. That was included in the timeline.
Mr. Greenwood. Okay. Now, you testified earlier that there
were at least two kinds of occurrences that would cause you to
amend minutes. One is someone, for instance Mr. Scrushy, would
say Mr. Hale you forgot that we said this. You forgot to
incorporate this in your minutes. And if you had what you
called an independent recollection of that being said, you
said, oh yes--you would say, oh, yes, I did--yes, I remember
that but I did not put it in the minutes so I will put it in
now. Okay. That is one way you would amend the minutes?
Mr. Hale. Yes, sir.
Mr. Greenwood. Okay. The other way you said you would amend
the minutes is if Mr. Scrushy told you that certain things
happened in executive sessions which you did not attend,
correct?
Mr. Hale. Well, that would be an addition, not necessarily
an amendment to something that was in there.
Mr. Greenwood. Okay. So the question I have is which of
those occurrences caused that sentence to be added to the
minutes? Is that because Mr. Scrushy reminded you of that and
you independently recollected all of that language, including
that there was a $15 to $20 million impact?
Mr. Hale. Yes, sir. I remember that being presented. Yes.
Mr. Greenwood. You remember it being discussed at that
board meeting?
Mr. Hale. The board meeting on August 6, not August 26. But
this is referencing back to the timeline of events.
Mr. Greenwood. Is it August 8 you mean?
Mr. Hale. August 8, yes.
Mr. Greenwood. Okay. Then why was it not put in the minutes
from the August 8 meeting? Why was it put in the minutes from
the August 26 meeting?
Mr. Hale. The--what is in the August 26 meeting is, it
states Mr. Scrushy asks Mr. Owens to review with the board the
timeline of events. So, Mr. Owens was going back through with
the board the timeline on when these--with 1753. So this was
referencing back the timeline of events.
Mr. Greenwood. All right. Well then go to Tab 7. And those
are the official minutes of the August 8 meeting.
Mr. Hale. Okay.
Mr. Greenwood. All right. Where in those minutes was a
reflection of this conversation?
Mr. Hale. It is not in there, sir.
Mr. Greenwood. Why not?
Mr. Hale. Well, everything is--I mean, I do not put every
detail in the minutes.
Mr. Greenwood. But on--you thought it was important to
amend the August 2 notes to say that on August 8 something
occurred, but you did not think it was important to amend the
August 8 notes minutes to actually reflect that? Is that right?
Mr. Hale. I was not requested to consider an amendment to
the August 8 notes.
Mr. Greenwood. No red lights went off in your mind that it
would seem funny that Mr. Scrushy thought it was critical to
have the August 26 minutes reflect this conversation?
Mr. Hale. He was requesting more detail than had been put
in the minutes. In looking--you know, in looking back at that
date when Mr. Owens said he communicated with Mr. Scrushy and
the amount that they were talking about was critical in that
time period. So I felt it was important.
Mr. Greenwood. So give us your independent recall now? What
do you remember, how do you remember that conversation
occurring? At the board meeting on August 8 what do you
remember--August 26, was there in fact that discussion and can
you recall it for us?
Mr. Hale. I recall Mr. Owens going through a very detailed
timeline of those events and the sequence of those events. And
including, you know, when he told Mr. Scrushy, what they
initially thought the range of impact would be. You know, the
meetings with CMS and, you know, when that changed after that
meeting when they were--it was indicated that it would apply to
more of the outpatient centers than they initially thought.
That was--it what was presented. That is what I recall. Yes,
sir.
Mr. Greenwood. My time has expired.
We are going to wait a moment for Mr. Walden to return.
Before I give time to Mr. Walden, Mr. Horton, you were at
that August 16 board meeting, is that correct?
Mr. Horton. Yes, sir, it is.
Mr. Greenwood. Do you recall the conversation, do you
recall the discussion in the same way that Mr. Hale recalls the
discussion?
Mr. Horton. My recollection, I got a little confused there.
But my recollection is consistent with what's in the minutes.
Yes, sir.
Mr. Greenwood. The gentleman from Oregon for 10 minutes.
Mr. Walden. Mr. Horton, I want to go back to how the board
minutes were handled. Are you--do you think there were any
problems with the approval process for the board minutes?
Mr. Horton. The question that has come up in this process,
I know in several meetings with the staff, was the approval of
the minutes. And typically as I think--as I think one of--I
apologize, I can't remember which of you alluded to before, it
was not the common practice to actually formally approve the
minutes at each subsequent meeting from previous meetings. And,
yes sir. I think that is a weakness in the system, and that----
Mr. Walden. Let me make sure I understand your role in
this, too. You are the corporate counsel?
Mr. Horton. I was. Yes, sir.
Mr. Walden. You were. And you were during for how long?
What period of time gain?
Mr. Horton. From July 1994 until September 2003.
Mr. Walden. And did you ever advise them to handle the
minutes in a different manner?
Mr. Horton. No, sir. I do not believe I did.
Mr. Walden. Yes. Were you aware of any of these
investigation of a board member?
Mr. Horton. I do not know that I was particularly aware of
an investigation. I had heard at some point that Mr. Scrushy--I
had understood that Mr. Scrushy had asked someone to look into
Mr. May's background and whether--sort of the employment
history that was on his resume, if you will was--was accurate
and complete. And I later heard that it was. But I was not
particularly aware of details of that.
Mr. Walden. Yes. Now, I thought we heard from Mr. Goodreau
that there was something in Mr. May's background that was not
know beforehand. Some bankruptcies or something?
Mr. Goodreau. I believe Mr. May was involved in some
companies with some bankruptcy troubles, and I did not know
that about it and I did not think Mr. Scrushy did. That was
what I was saying, that I made him aware of that.
Mr. Walden. You made Mr. Scrushy aware of that?
Mr. Goodreau. Yes.
Mr. Walden. I still do not understand why you would not
have made Mr. Scrushy aware of the comment about an accounting
problem, Enron--not Enron like but all of that.
Mr. Horton, were you ever made aware of any accounting
problems?
Mr. Horton. No, sir. I was not.
Mr. Walden. So nobody stepped up and told you. And the
board was never made aware. Is that accurate?
Mr. Horton. As far as I know that is correct, sir.
Mr. Walden. Okay. Mr. Horton, if you could turn to Tab 87.
That is where you will find an email that you wrote to Mr. Hale
and Weston Smith on September 29, 2002, and you write, ``I am
finding no record that I was ever given drafts of audit
committee minutes for 2001 after March 27 or 2002. Do either of
you know the status of audit committee minutes?'' And the email
is Tab 87. It shows it is from you.
Mr. Horton. That's----
Mr. Walden. I'm sorry. It is apparently Tab 86.
Mr. Horton. Okay.
Mr. Walden. Okay.
Mr. Horton. I have it now. Yes, sir. I'm sorry. What was
the question?
Mr. Walden. The question is--well then if you will turn to
Tab--is that probably 87 then? 87 there are two emails between
you and Weston Smith dated October 7, 2002. After you again
request the audit minutes. Mr. Smith writes ``Bill, copies of
the minutes were sent to George Strong last week. He had
requested them in response to Fulbright. We have 2002 minutes.
None were prepared in 2001.'' So my first question is why did
not you as corporate counsel have copies of the audit committee
minutes?
Mr. Horton. Well----
Mr. Walden. Would you normally have had copies in prior
years?
Mr. Horton. In the normal course the minute books were
maintained, physically maintained in my department. So
ordinarily they would have come to us. Yes, sir.
Mr. Walden. Okay. Why did it take nearly a year and a half
to ask for the audit committee meeting minutes?
Mr. Horton. I do not think I had become aware that we did
not have the minutes until that point.
Mr. Walden. So who was responsible for maintaining the
minutes for committee meetings? Somebody in your department?
Mr. Horton. No, sir. Normally the--the corporate secretary
normally maintains the minutes. If it is a circumstance where
there were, you know, multiple committee meetings going on at
more or less the same time, then the corporate secretary, Mr.
Tanner or Mr. Hale as the case may be, might ask me or one of
the other assistant secretaries to take minutes for one
committee meeting while he covered another one.
Mr. Walden. Sure. Yes.
Mr. Horton. And as far as a I know, in these particular
audit committee meetings for whatever reason, nobody was ever
requested to take minutes.
Mr. Walden. You know, I hope you understand. Again, having
spent 5 years on a relatively small bank board, we had somebody
taking minutes at every committee meeting. And they came up to
the board--we met every month, the board did. And the
committees did not always meet every month. But the minutes
came forward. We had presentations to the board. We reviewed
the minutes. We reviewed the minutes of the board meeting. We
acted on them. There was an agenda. If we went into executive
session, it was spelled out.
How in the devil does a Fortune 500 company not have a
board that meets, you know, once or twice a year and you do not
keep minutes? Can you explain that to me?
Mr. Horton. To have a committee that meets once or twice a
year or----
Mr. Walden. How often did the board meet?
Mr. Horton. It would vary from year to year. In a typical
year, I would say 10 or 12 times.
Mr. Walden. Ten or 12 times a year the board met? I was
under the impression they only met like once or twice a year.
How often did the committee met? The audit committee?
Quarterly? Monthly?
Mr. Horton. The audit committee in recent years, as I
understood it, met quarterly. But I am not--going back further,
I do not think they did.
Mr. Walden. Did the proxy statements reflect that?
Mr. Horton. Yes, sir. The proxy statements reflected the
total number of meetings for each committee. Yes. For the
preceding year, and the total number of board meetings.
Mr. Walden. I am told the proxy statements for 2001
indicate that the audit committee met one time.
Mr. Horton. That's--that is what the proxy statement
reflects. I understand that the audit committee members have
records of other meetings which were not in the corporate
minutes at the time the proxy statement was prepared.
Mr. Walden. Whose job was it to keep track of the minutes
of the committee meetings? If the committees were meeting and
no minutes were taken or if members had minutes of committee
meetings and they were not provided, I mean who is running the
ship here?
Mr. Horton. I cannot answer that question, sir.
Mr. Walden. Were you ever asked to--if the minutes were
kept in your books in your office, was it your responsibility
to ask where they are? I mean, you did ask in this one email,
and I commend you for that. But----
Mr. Horton. Sir, in circumstance as in this case where it
came to my attention that we were missing minutes, I would try
to find out about them. If--if it did not come to my attention,
you know, I would not necessarily ask.
Mr. Walden. So you had members of the board who met as
committees to review various things and you are telling me that
the board met basically every month, 10 to 12 times a year,
right?
Mr. Horton. In a typical year. Yes.
Mr. Walden. Typical year. And are there agendas indicating
that the chairs of the various committees of the board
discussed what they had met and talked about as committees? Was
that on an agenda?
Mr. Horton. In the ordinary course I did not see board
agendas, sir. So I really am not in a position to answer that
question.
Mr. Walden. Did you sit in on the board meetings?
Mr. Horton. Again, as I said earlier, I sat in if I was
invited to sit in. I did not sit in as a routine matter.
Mr. Walden. How many board meetings a year would you have
sat in on?
Mr. Horton. Again, as I testified earlier, it would have
depended on the subject matter and whether Mr. Scrushy, who was
the chairman and CEO for all the time that I had been there
until the end of March, invited me.
Mr. Walden. Oh, if he invited you? Oh, I see. All right.
Did Mr. Scrushy tell you that the 175--okay. Let me go to a
document. Mr. Scrushy sent an email to Larry Doc Leemack at
sourcemed.net on August 27. And we will provide you with that.
In this email he says ``Thanks. The genius in all this will
be seen later. We will take some heat only in the shortrun.
Swad told me he had talked to you and I appreciate you'' that's
the type ``support and understanding. I will call you soon to
go over everything. RS.''
Did Mr. Scrushy tell you the $175 million announcement was
a genius plan?
Mr. Horton. No, sir.
Mr. Walden. Do you know what he's referring to?
Mr. Horton. No, sir, I do not.
Mr. Walden. Do you know anything about whatever this plan
is he references? Did he ever talk to you about his strategy on
the announcement of the $175 million?
Mr. Horton. I discussed with him the substance of the press
release in which that was announced. But I--I do not know of
any particular strategy. No, sir.
Mr. Walden. Do any of the rest of you? Are any of the rest
of you aware of what this might mean, the genius of all this
will be seen later?
I will ask you individually. Mr. Hale?
Mr. Hale. No.
Mr. Walden. Mr. Goodreau?
Mr. Goodreau. No, sir.
Mr. Walden. Mr. Tanner?
Mr. Tanner. No, sir.
Mr. Walden. You all say no?
Who is Larry Doc Leemack?
Mr. Horton. Dr. Leemack is a physician in Birmingham.
Mr. Walden. Was a he stockholder in the company?
Mr. Horton. I believe he is a stockholder. Yes, sir.
Mr. Walden. Okay. All right.
I do not have any other questions. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes himself for 10 minute.
Mr. Horton, let me ask you a series of questions. When were
you first made aware of Transmittal 753?
Mr. Horton. 1753? I was made aware of it on June 6 of last
year.
Mr. Greenwood. Okay. Was this the first time that you were
made aware of issues with regard how HealthSouth was billing
Medicare for group therapy?
Mr. Horton. We had issues that had arisen in a case filed
under the False Claims Act in which the Department of Justice
intervened. It was actually four cases in which the Department
of Justice intervened in December 2001, January 2002.
Mr. Greenwood. Okay. So you knew way back then that this
was at least a potentially serious liability for the company?
That other companies in a similar business, the same business
as HealthSouth, was being subjected to lawsuits over its
billing practices? Is that correct?
Mr. Horton. That other companies were being subjected to
law--I was aware of lawsuit directed against HealthSouth.
Mr. Greenwood. Against HealthSouth. Okay. So you knew there
was a suit out there?
Mr. Horton. Yes, sir.
Mr. Greenwood. And when did you first know that?
Mr. Horton. The original lawsuit, I guess before the
government intervened, we were made aware by the Department of
Justice in sometime in 2000, I believe.
Mr. Greenwood. Okay. And did you share that information
with Mr. Scrushy?
Mr. Horton. Yes, sir.
Mr. Greenwood. Okay. When you became aware of Transmittal
1753 what other officers of the company did you discuss this
with?
Mr. Horton. Discussed Transmittal 1753 with Bill Owens who
was then the President and CEO, with Weston Smith who was then
the CFO, with Susan Smith who was the Senior Vice President of
Reimbursement, with Larry Taylor who was at the time the
President of our Ambulatory Services Division and at various
times with other lower level officers.
Mr. Greenwood. And never with Mr. Scrushy?
Mr. Horton. I do not recall having any discussions with Mr.
Scrushy about it until sometime in August 2002.
Mr. Greenwood. How did you advise the company to address
the Medicare billing for group therapy while the company was
sorting through the issues?
Mr. Horton. My advice was to take a conservative position
and assume, while there were questions about what Transmittal
1753 meant, that we needed to assume that it applied to our
outpatient operations and take what I would characterize as a
conservative position on the issue.
Mr. Greenwood. And did the company act on your advice?
Mr. Horton. The company, ultimately the decision was to
seek clarification from the Centers for Medicare and Medicaid
Services, CMS. And it was my understanding that the operations
personnel were directed not to bill Medicare for outpatient
therapy services during a period beginning July 1, 2002 until
that clarification had been obtained.
Mr. Greenwood. Okay. I want you to turn to Tab 29, if you
would. You will find an email, dated July 7, 2002 with an
attachment which you forwarded to Bill Owens, Weston Smith and
Susan Jones-Smith. And attached to that is a memo from Tom Fox
of Reed Smith on the status of group therapy issues.
On page 7 of the memo----
Mr. Horton. Mr. Chairman, that is not Tab 29 in my book.
Mr. Greenwood. All right. I will clarify that for you then.
79. I am sorry. Somebody's sevens look like a two. Okay.
On page 7 of the memo in the first full paragraph,
``HealthSouth outside counsel advises ``However if HealthSouth
were to continue to utilize the clinical standards followed in
the past which essentially limited billing under the group
therapy code only when two or more patients were treated at the
same time with the same modality as opposed to billing for
concurrent therapy, if the patients were treated with different
modalities, the risk of liability for claims submitted by
HealthSouth for services provided after July 1, 2002 is greatly
increased and could implicate its rehab hospitals.'' You see
that?
Mr. Horton. Yes, sir.
Mr. Greenwood. All right. In your email you state that you
agree with this advice and that you want to get clarification
to the field right away. What was Mr. Owens' response when you
discussed this with him?
Mr. Horton. I did not--I do not recall discussing this
particular email and memorandum with him. I have discussed the
issue with him on a number of occasions and his response was to
schedule a meeting with appropriate officials at CMS to attempt
to get clarity on the issue. And a meeting was ultimately
scheduled with Tom Grissom, who was then the relative person at
CMS.
Mr. Greenwood. Okay. Then I am going to ask you to turn now
to Tab 80 in the binder. And there you will find another email
from Tom Fox of Reed Smith, dated July 24, 2002.
Mr. Horton. Yes, sir.
Mr. Greenwood. It reads: ``This is what I would say to Bill
Owens and Richard if I had the opportunity, unless and until
Transmittal 1753 is withdraw, outside counsel is telling the
company that it faces substantial risk of false claims
liability by not following that coding and billing policy for
therapy effective July 1, 2002.'' And my question to you is
what did you do with this advice from HealthSouth's outside
counsel? Who did you tell about it?
Mr. Horton. Throughout this process I was conveying this
advice to Mr. Owens, to Weston Smith, to Susan Smith through
the operations and reimbursement chains.
Mr. Greenwood. As the general counsel of this company,
would not you have wanted to make sure that the CEO himself
understood that there was significant and serious jeopardy,
financial jeopardy, perhaps worse if they did not change their
billing practices?
Mr. Horton. Sir, as I have discussed with the staff when we
originally addressed this, my belief was that unless I could
get Mr. Owens and the senior operations personnel to form a
unified position on this issue, that if I took it to Mr.
Scrushy without that, that Mr. Scrushy would disregard it.
Mr. Greenwood. Now, you knew he was engaged in a stock
sale, Mr. Scrushy, right? You were aware that he was--of his
preparations and his ultimate sales of ultimately $99 million
worth of stock?
Mr. Horton. Beginning in early to mid-July. Yes, sir.
Mr. Greenwood. All right. Okay. Now, you are a smart
lawyer. Did it occur to you that Mr. Scrushy's knowledge or
lack of knowledge, relative knowledge of this change in billing
practices might have some legal implications with regard to the
timing of the sale of the stock?
Mr. Horton. No, sir. At this point I had no basis to
evaluate the materiality of this information. So I did not
really take that into account.
Mr. Greenwood. Materiality as it regards what?
Mr. Horton. Materiality as regards financial impact of----
Mr. Greenwood. Well, you know it was--you had been advised
by outside counsel that it was a serious issue that would have
significant impact on the company, were you not?
Mr. Horton. I do not think outside counsel had provided us
with any information. And, indeed, I do not think they could
have provided us with any information.
Mr. Greenwood. Okay. So in other words, they did not tell
you this magnitude of the impact on the company of changing?
They just suggested that change needed to be made?
Mr. Horton. That is correct.
Mr. Greenwood. Okay. Was Mr. Scrushy aware in 2001 that the
Department of Justice was planning to intervene in a false
claim suit that alleged HealthSouth was improperly billing
individual therapy when they should have been billing for
group?
Mr. Horton. He was aware that we were in communication with
DOJ throughout 2001 about their possible intervention in the
False Claims Act litigation. And then when we received
confirmation that DOJ was going to intervene in late December
2001, he was aware of that. Yes, sir.
Mr. Greenwood. Did Mr. Scrushy have an understanding about
what the government's allegations were with respect to group
therapy charges?
Mr. Horton. I discussed it with him, sir. I assumed he had
an understanding from that.
Mr. Greenwood. Did you engage in discussions with Mr.
Scrushy about the potential damages facing the company in a
False Claims suit?
Mr. Horton. Not at that time. No, sir. We did not have any
basis on which to quantify damages.
Mr. Greenwood. Were you present in any meeting prior to
Transmittal 1753 where Mr. Scrushy discussed what HealthSouth's
strategy should be with respect to the group therapy claims
alleged in the False Claims lawsuit?
Mr. Horton. There was a meeting that occurred, I believe,
in March 2002 at which Mr. Scrushy was present where we
discussed strategies to get legislative clarification of the
group therapy issue from this House. Yes, sir.
Mr. Greenwood. Is it fair to say that Mr. Scrushy was well
aware prior to Transmittal 1753 of HealthSouth's billing
practices concerning group versus individual therapy claims and
the potential claims against the company asserted by various
False Claims suits?
Mr. Horton. He was certainly aware of the False Claims Act
litigation and the nature of the claims therein. Yes, sir.
Mr. Greenwood. As general counsel did you feel that you had
the access to Mr. Scrushy that you needed, the ability to
advise him of what you know, to make recommendations to him?
Because it sounds like you needed to go--that between you as
general counsel and Mr. Scrushy as CEO, there were other
officers that you had to either convince them--you had to
convince them before you dared to take this information to Mr.
Scrushy?
Mr. Horton. In general, I do not think I would characterize
it as a problem of access, sir. But I would characterize it as
a question of what was going to be needed to get his attention,
particularly in the last couple of years. Mr. Scrushy was
never--was never an easy man to discuss things with that were
bad news or that would make him unhappy. And in particular it
was my belief that if--if I raised an issue that involved
operational matters and did not have a consensus among the
operations people, that in all likelihood my advise would be--
would be discounted or perhaps disregarded.
Mr. Greenwood. Would you be uncomfortable having to operate
under that circumstances?
Mr. Horton. Yes, sir. I did.
Mr. Greenwood. Okay. Is it your recollection that Bill
Owens shared with Mr. Scrushy in February 2002 an estimate of
the potential impact of changing HealthSouth's billing
practices?
Mr. Horton. In February 2002?
Mr. Greenwood. Yes.
Mr. Horton. I do not believe I am aware of that, sir.
Mr. Greenwood. Okay. I have no further questions.
I would----
Ms. DeGette. I have a couple.
Mr. Greenwood. We will get to you in a second, Ms. DeGette.
I would move that we enter the documents into the record.
And without objection, that will be the case.
Ms. DeGette, do you have additional inquiry?
Ms. DeGette. Yes, I do. Thank you.
Mr. Horton, as I sit here and review all of your
correspondence in July 2002 regarding Transmittal 1753 and
going back and forth, and as I listen to your answers to the
Chairman's questions it occurs me that there was quite a bit of
concern on the part of the legal department as to what people
should be doing about the group billing code for the physical
therapy sessions. Would that be a fair statement on my part?
Mr. Horton. There was certainly a lot of concern. In
general, I was the only person in the legal department who was
actively involved in this issue.
Ms. DeGette. Okay. So you were concerned?
Mr. Horton. Yes, ma'am.
Ms. DeGette. And that is because HealthSouth was doing a
lot of physical therapy sessions and how that was billed would
be important to the company, right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. And as general counsel you wanted to make sure
that the company was billing correctly because of liability
issues, right? I think you said that?
Mr. Horton. That is correct.
Ms. DeGette. Did you ever ask anybody from the financial
management of the company about what the financial impact would
be of a changing code?
Mr. Horton. I do not think I specifically asked that. I
certainly tried to get the financial--the CFO and the head of
reimbursement to focus on this issue.
Ms. DeGette. Did they ever tell you what the impact would
be?
Mr. Horton. I did not receive any information on the
financial impact until--until after August 15, I guess, of last
year which----
Ms. DeGette. Of 2002?
Mr. Horton. Of 2002, which was the $175 million estimate.
Ms. DeGette. And even before the $175 million, in fairness,
you knew that it would be a large number, right?
Mr. Horton. I really did not--did not have information to
make an estimate of the number. I mean, large----
Ms. DeGette. Well, I mean in that case, if you look at Tab
79 where you are sending--it looks like an email to Bill Owens
from you with the memo from Tom Fox on the status of group
therapy issues, and you say ``importance high'', right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. And then there is the memo. And you say ``In
particular I point out that Reed Smith's strong advice is the
recent group therapy transmittal should be read to apply to all
non-PPE PT or OT services. I agree with this position.'' And
you go on. So you thought this was important enough to send it
to Bill Owens with high importance, right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. And then there are some follow up emails. An
email from Tom Fox to you on July 24.
During that period of July 2002 you were really--you
thought this was important to get resolved, right?
Mr. Horton. Yes, I did.
Ms. DeGette. And did you get it resolved?
Mr. Horton. I thought I had ultimately in August.
Ms. DeGette. All right. Now, I have a memo I would like to
show you, and it is not in your notebook. If we can have this
given to--you have it?
Mr. Horton. I believe so. Yes, ma'am.
Ms. DeGette. Okay. Because I believe you said earlier in
response to a question by the Chairman that you were not
particularly--or you had not heard any allegations of
accounting problems. Is that correct?
Mr. Horton. That is correct.
Ms. DeGette. Now, I have shown you a memo. It is dated
September 29, 1999. And it is from you to Michael D. Martin and
William T. Owens, the CFO and controller at that time, right?
Mr. Horton. Yes, ma'am.
Ms. DeGette. Do you recognize this memo?
Mr. Horton. I do.
Ms. DeGette. Okay. I find this curious, because you said
you did not know of any accounting problems. But in 1999 you
are sending this memo to Martin and Owens and it says ``I
thought you might find interesting the enclosed press release
put out by the SEC indicating its recent filing of 30
enforcement actions against 68 individuals and companies for
allegedly engaging in various types of financial reporting
fraud.'' And then it goes on to say ``In any event, I thought
that you might be interested in seeing the sorts of practices
that the SEC has been focusing its attention on.''
And then the attached memo from the SEC says: ``Together'',
and it is talking about these enforcement actions, ``these
actions allege a variable cookbook of recipes for fraudulent
accounting and reporting, including'' and then it lists a whole
bunch of things including as some of the things that we now
know happened with HealthSouth. Things like creation of
fictitious invoices, back dating of agreement, reporting of
expenses as capital assets, over valuations of inventory.
So I guess my question to you is if you had not heard of
any allegations of accounting abuses before then, why on earth
did you send the CFO and the controller this memo?
Mr. Horton. I think, you know, if you look back at my
correspondence over the years that I was at HealthSouth, you
will find that not infrequently if the SEC announced something
that it regarded as a significant development, I would
circulate it to people that I thought would be interested in
it.
Ms. DeGette. Oh, okay. So this was just part of your
routine correspondence with the senior management of the
company?
Mr. Horton. Yes, ma'am.
Ms. DeGette. How many times would you say you sent memos
like this out?
Mr. Horton. I could no give you an accurate number. If you
go back in--certainly in the period 2001/2002 when the SEC was
doing a significant amount of pronouncing, if you will, on
financial reporting and management discussion and analyses and
filings and that sort of thing, I think you will find several
things that I provided to people in connection with
regulation----
Ms. DeGette. Well, what about in 19--I think you said you
started in 1994?
Mr. Horton. Yes, ma'am.
Ms. DeGette. What about the period 1994 to 2001?
Mr. Horton. Again, I mean there is no magic to the number.
But you will go back and I think you will find--you will find
these sorts of things going back pretty much the whole period
of time that I was with the company. It is one of the things
that I did.
Ms. DeGette. Thank you.
Mr. Greenwood. The Chair thanks the gentlelady.
The chair thanks the witnesses for your willingness to come
here today and for your testimony. I know it has been a long
day.
As far as I can tell, this the tragic case, another tragic
case where a company that had lots of potential filled with
thousands of honest, good employees had a leadership at the top
that was corrupt. And it is evidenced at least by the five CFOs
that have already plead guilty, 10 other senior executives
having plead guilty. Mr. Scrushy still maintains his innocence.
And we will be watchful of how that turns out.
This will play itself out in the courts. And we wish the
company well. We think the company has new management that is
going to do its level best to bring this company into a new and
brighter era, in that the company will be vital and that the
employees will continue to provide the services that they do
out in those little clinics to people who are in pain, which is
what a company like this should have been focused on.
I imagine some of the witnesses, including probably all of
you, will wind up giving your testimony in a court of law
before this over. I wish you well on that.
And I enter into the record a ``Wall Street Journal''
article from yesterday, entitled ``Scrushy Claims FBI Agent is
Close to Witness'' and it talks about what we have talked about
here with regard to the taped conversations. But it also says
this: ``Earlier this month Mr. Scrushy's attorney, Richard
Dean, Jr. a well respected U.S. attorney who works in the
Atlantic office of Jones Day, became more involved in Mr.
Scrushy's defense. Donald V. Watkins, a Birmingham attorney who
directs Mr. Scrushy's defense says the legal team has held
focus groups to test how a jury might react to any dirt they
may have on the 15 former HealthSouth executives who have
agreed to plead guilty in connection with the case and others
who might testify against Mr. Scrushy. Mr. Watkins, the lead
attorney for Mr. Scrushy, says such details are fair game for
public disclosure. ``Human beings make mistakes in life. Some
as a result of negligence, other as a result of lifestyles,
intentional acts of deception. It is our job to find out who
these people really are'' Mr. Watkins said. This case has
everything in it. It has mystery. It has got sex. It has got
death. And it is high stakes. It is a real life drama being
played out on a daily basis before a national audience.''
So those are the tactics to which Mr. Scrushy is prepared
to go in his defense. And I wish you well in dealing with those
kinds of tactics when this matter goes to court.
Thank you again.
And the subcommittee is adjourned.
[Whereupon, at 4:08 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
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<all>