Alleged Fraud by HealthSouth’s Scrushy Is Detailed in Affidavit

HealthSouth Corp. founder Richard Scrushy’s alleged plan to inflate company books by $2.7 billion started to unravel as employees became increasingly reluctant to carry it out, a federal agent said in papers unsealed Monday.

To keep employees in line, Scrushy offered pay raises to bookkeepers, a promotion to one executive and a pledge to “take care” of another officer’s wife if he would be “the fall guy” for the fraud, according to an affidavit filed to justify a search warrant.

The details of the alleged fraud in the affidavit came from FBI accounts of interviews with former HealthSouth Chief Financial Officer Bill Owens and former Controller Weston Smith made in early 2003.

Owens and Smith have never spoken publicly about Scrushy except to answer charges and plead guilty. Both declined to testify in a related civil hearing to seize Scrushy’s assets last year.

U.S. Magistrate Michael Putnam in Birmingham, Ala., unsealed the affidavit upon the request of Scrushy’s defense lawyers. His lawyers argued that the FBI’s raid on HealthSouth’s Birmingham headquarters to seize evidence in March 2003 lacked probable cause, according to court papers.

Owens said Scrushy was trying to sell HealthSouth to a private company in a leveraged buyout by March 2003, according to the FBI account in the affidavit.

“Scrushy told Owens that Scrushy wanted to make HealthSouth private so that financial reports would not have to be public,” the report said.

Scrushy was indicted in October 2003 and charged with perjury, obstruction of justice, money laundering and securities fraud. He has denied the charges and goes to trial next month.