These is just something irresistible about the quotes that emerge from the parallel accounting fraud trials of Bernie Ebbers in New York and Richard Scrushy in Birmingham, Alabama. In the HealthSouth case, former CFO Bill Owens completed his eighth day on the witness stand (time sure flies by when you’re having fun) and the government finished its direct examination by playing the last of the six audio tapes Owens made over a two-day period in March 2003. A short time later, the FBI executed a search warrant at HealthSouth’s headquarters, after which the board relieved Scrushy of his CEO position. Among other things, the tape recording has Scrushy telling Owens, "You’ve got accountants signing off on all this. You’ve got everything set up. You’re smart, Bill, but you’ve got to lead your troops. I’ll do whatever you want me to. I think you ought to go down fighting, Bill. You ought to go down fighting." While this statements is potentially nefarious, Scrushy’s comments are not the proverbial smoking gun, and he is likely to testify to explain what he meant — no doubt with lots of martial and sports references thrown in to complete the picture. The cross-examination of Owens has begun, and expect him to testify well into next week. An AP story here discusses the testimony and tapes. (ph)
Category: HealthSouth
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The Owens Tapes have been admitted at the trial of former HealthSouth CEO Richard Scrushy, including Scrushy’s statement regarding the non-existence of certain conversations. The defense had fought vigorously to keep the tapes made from a wire worn by former CFO Bill Owens from being admitted at trial. After foundational testimony from Owens and an FBI technician, and apparently a lengthy lunch-time argument on admissibility, U.S. District Judge Karon Bowdre admitted them into evidence and the jury has begun hearing Scrushy’s unadorned statements. The defense has argued that the tapes actually exonerate Scrushy, and it is unlikely any contain the type of pure admission of guilt that is seen on TV cop shows. With the admission of the tapes, it is much more likely that Scrushy will have to testify to explain what he meant and why he said certain things — like why a conversation should not be acknowledged as having occurred. An AP story here discusses the admission of the tapes, and more will be played for the jury over the next day or two. Expect the cross-examination of Owens to begin by next week, and it may prove to be lengthy, with more than a few lurid details coming out. (ph)
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The HealthSouth and WorldCom trials continue along their parallel paths as former WorldCom CFO Scott Sullivan took the witness stand on Monday, Feb. 7, to begin what promises to be a long engagement testifying against Bernie Ebbers. On his first day of testimony, Sullivan — the government’s star witness because he is the principle link between Ebbers and the multi-billion dollar accounting fraud — stated that Ebbers had a "hands on grasp of financial information." (AP story here) At the HealthSouth trial, former CFO Bill Owens admitted on Friday, Feb. 4, that he had not filed income taxes for the period from 1995 through 2002, and had not repaid loans totaling $1 million from HealthSouth. Sullivan made his own admissions, stating that he used marijuana and cocaine over a two decades and, perhaps more tellingly, lied to the Department of Defense about his drug use as part of a security clearance check. Being an admitted liar is not helpful to the government’s case that hinges largely on the testimony of Sullivan.
Once the government’s direct examination ends, expect the defense to mount significant attacks on Owens and Sullivan, both of whom entered into plea agreements with the government and will be open to questions regarding their veracity (the always-effective "Which time were you lying?" question). (Birmingham News story here (Owens) and Wall Street Journal story here (Sullivan)). (ph)
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Former HealthSouth CFO Bill Owens has now spent four days on the witness stand describing the construction and operation of the accounting fraud at the company. His testimony on Friday, Feb. 4, supplied a motive for Scrushy’s involvement in the inflation of revenues: selling his shares. Scrushy appeared on CNBC in 2002 touting the HealthSouth as an undervalued company, stating that its shares were worth $20, shortly before he exercised stock options and sold the shares for $74 million. A short time later, the CEO/CFO certification requirements of Sarbanes-Oxley became effective, leading to the alleged false certifications charged against Scrushy.
The defense has not gotten the chance to cross-examine Owens yet, and I would expect that process to take at least as long as his direct testimony, if not longer. An AP story (here) describes the day’s proceedings. (ph)
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The big east coast and deep south white collar cases (Ebbers, Kozlowski, and Scrushy) continued yesterday, all still in the prosecution portion of the case. And it looks like the prosecution has quite a bit more to present in these three cases. For an update on specific testimony presented, check out the "CEO Blotter, Corporate Execs In Court" found on the Atlanta Jrl-Const. website. It sounds like the prosecution had some difficulty in the Ebbers trial (see here and here).
On the west coast, the trial of Richard Hawkins, former CFO of McKesson, continued yesterday with more prosecution evidence. This trial, however, appears to be in the final stages of the prosecutor’s case. (see here).
All of this, and I haven’t even mentioned cases that may be forthcoming from investigations related to Enron. It sounds like things are building up in that corner of the country as a title of an article in the LA Times this a.m. is "Tapes Reveal Enron’s Power Plant Rigging."
(esp)
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It sounds like a rolling admission process, only the recipients have not applied to enter the group and would only wish they could decline acceptance into the indicted club. The United States Attorneys Office for the Northern District of Alabama indicted James P. Bennett – and yes, right in the middle of Richard Scrushy’s trial. (See release of the USA’s office) (See also the AP story in the Atlanta Journal Constitution and check out the status of the Scrushy trial on the Birmingham News site.)
Bennett, the former HealthSouth corporation president (see employment contract between Bennett and HealthSouth), has been indicted for "conspiracy, securities fraud, insider trading, and money laundering in connection with the $2.64 billion accounting fraud that occurred at HealthSouth Corporation." (DOJ Press Release). The conspiracy count is premised on mail fraud, wire fraud, and securities fraud and from the DOJ press release it sounds like one count is for false statements. The indictment, according to the DOJ press release also seeks "forfeiture of approximately $28,133,000."
This is a perfect example of a difference in the way prosecutions occur in the white collar and street crime setting. In street crime cases, the individuals most often are indicted and then proceed to trial as a group. In a white collar case, however, prosecutors often move more slowly and an indictment in the middle of the trial can therefore occur.
But this certainly can put a damper on defense strategy. Why? 1) In some cases, it means that a witness who might have planned to testify for the defense will no longer be available as they may be concerned about something being used against them at their own trial. 2) A mid trial prosecution of a new individual can also cause the defense to change its strategy, especially if they planned to argue that the government was not proceeding against the most culpable player.
Other than a possible strategic benefit, why would the government indict someone close to a case in the middle of another trial? 1) In some situations this could mean that the government acquired new information as a result of the pending trial. The new information might allow them to now proceed against this other party. 2)Or maybe the new defendant was frightened by the trial and suddenly decided to talk and the indictment will be followed by a plea agreement 3)Or maybe the individual on trial decided to cooperate after finding the evidence against them incredibly damaging and this new indictment comes from this conversation.
There is a downside to the government in waiting to charge a codefendant, especially when there is a conspiracy charge. By not having a joint trial, the available evidence may be limited to just what happened with regard to this one person and any unindicted co-conspirators. A sooner indictment could mean that the individuals are all tried in unison.
So what happened here? Will it affect the trial of Richard Srushy and will it help or hurt the government’s case?
(esp)
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A lengthy front-page article in the Wall Street Journal (here) discusses the various attorneys who have represented Richard Scrushy since problems began at HealthSouth in mid-2002, including a dispute over billing with the Jones Day firm that has triggered an ethics complaint against the firm with the Washington, D.C. bar authorities. (ph)
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The government set the stage for introducing the audiotapes made by Bill Owens, HealthSouth’s former CFO, who wore a wire for two days immediately before the FBI executed a search warrant at the company as part of its accounting fraud investigation. The defense has raised questions regarding the veracity of the tapes and problems regarding the government’s handling of them. At the trial today, prosecutors called an FBI evidence technician, who testified she made an "honest mistake" when she put the incorrect date on the evidence log for the tapes. The defense has sought to exclude the tapes from being introduced at trial, a position U.S. District Judge Karon Bowdre rejected before trial (see earlier post here) but did give the defense the opportunity to raise admissibility questions at trial. The government appears to be laying the foundation for admission of the tapes through Owens. Interestingly, while the defense has sought to exclude them, counsel has also said they are exculpatory of Scrushy and show that it was Owens who was the perpetrator of the fraud. No harm in having a fall-back position, in case the tapes come in. An AP story discussing the testimony at Scrushy’s trial is here.
This type of evidence is uncommon in white collar cases, but not unique — recall the prosecution of senior Rite Aid executives involved a cooperating witness who wore a wire to meetings with other defendants. The recordings in that case were challenged as being made in violation of Pennsylvania Rules of Professional Conduct 4.2 and 8.4 because it was an unauthorized contact with a represented person and involved dishonest conduct by the federal prosecutor, U.S. v. Grass, 239 F.Supp.2d 535 (M.D. Pa. 2003), arguments the district court rejected in refusing to suppress the tapes. (ph)
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The government witness testifying on Jan. 31 in the trial of Richard Scrushy was Harvey Kelly, who worked for PriceWaterhouseCoopers as an accountant in its investigation of the accounting fraud at HealthSouth. Kelly testified that he did not come across any documents (memoranda, e-mails, etc.) specifically linking Scrushy to the overstatements of revenue and income at the company, although he also noted that he was not looking for any when he conducted the internal investigation of the accounting issues. The testimony is consistent with the defense theory that financial officers of the company were responsible for the fraudulent accounting, although it does not undermine the government’s position that Scrushy urged those same officers to do whatever was necessary to make the numbers Wall Street wanted to see. It is likely the government will soon call Bill Owens, a former CFO and senior officer at the company, to testify about Scrushy’s involvement in the misconduct; his testimony is expected to be quite lengthy, with the cross-examination very contentious with regard to the recordings he made prior to the government’s search of HealthSouth’s offices. An AP story (here) discusses Kelly’s testimony.
MattBray.net 