Securities Newsroom

The Documents Were Required Under The Newly Passed Sarbanes-Oxley Act, Which Imposed Stiff Criminal Penalties For Fraud

Former HealthSouth executive Weston Smith leaves the Hugo L. Black Federal Courthouse on Monday after testifying in the federal trial of former HealthSouth CEO Richard Scrushy. 
Although a former HealthSouth finance chief tearfully testified Monday about pressure to sign false financial documents, the defense will likely depict him as an opportunist whose silence was bought with a new job, legal experts said.


Former Chief Financial Officer Weston Smith testified that due to new criminal penalties he didn't want to sign papers vouching for the company's accounts in 2002.
However, Smith eventually signed the documents after meeting with then-Chief Executive Richard Scrushy, who Smith said was aware of the fraud. Smith also was named as the CFO for a planned spinoff firm.
 
Smith's continued testimony today was canceled because of a juror's illness. The trial resumes Monday after a spring break recess.
Smith's testimony could be damaging if it portrays Scrushy as domineering, said Charles Salvagio, a Birmingham criminal attorney.
 
Smith's testimony also shows the CEO exerting pressure to stop the departure of an executive with knowledge of the $2.7 billion accounting fraud, he said.
Scrushy, 52, faces a variety of federal charges stemming from the fraud at the rehabilitation health care operator. He has denied any wrongdoing.

Yet, Scrushy's defense team has several opportunities to raise doubt about Smith in the minds of jurors when they cross-examine him today, Salvagio said.
The defense can also question why Smith accepted a chief financial officer position if he was so upset with the fraud, Salvagio said.

They can also point out Smith has yet to be sentenced for crimes that could send him to prison for 25 years. He also faces $2.5 million in fines and $4.4 million in ill-gotten gains from the fraud.
Smith has pleaded guilty to conspiracy to commit wire fraud and securities fraud, knowingly certifying a false statement and filing a false statement with the Securities and Exchange Commission.
After the trial adjourned Monday, defense attorney Lewis Gillis pointed out that Smith still signed the financial documents and even created false documents to help cover up the fraud.
"He continued to create bogus documents," Gillis said.

Smith testified about a meeting where Scrushy berated him during a presentation that showed HealthSouth facilities were not meeting their financial goals. He said the goals were based on bogus numbers.

Later, Smith said he met with Scrushy and said it was a "fantasy" for the facilities to meet the goals.
"His response was, 'Hey, I'm setting a tone for the company. I know what's going on. Don't worry about it, just keep doing your job,' " Smith said.
He testified to hastily leaving HealthSouth headquarters on Aug. 5, 2002, to avoid signing documents vouching for the company's financial numbers. Smith said he didn't plan to return to his job. The documents were required under the newly passed Sarbanes-Oxley Act, which imposed stiff criminal penalties for fraud.

"I knew that by my actions, this whole thing was going to blow up," he said. "It was coming to an end."

He later testified about a meeting where Scrushy discussed splitting HealthSouth into two companies. Smith would become chief financial officer of the spinoff company after signing the certifications. Scrushy also vowed the fraud would end, he said.

"He said: 'No more creating earnings.' Those were his words," Smith testified.
Pressure from the top offices was an issue in the WorldCom accounting fraud case, said Jacob Frenkel, a former SEC enforcement attorney and former federal prosecutor. Yet the defense has an opportunity to attack Smith's testimony.

"They're going to say he wasn't coerced (to sign)," said Frenkel, who practices at Shulman, Rogers, Gandal, Pordy & Ecker in Maryland.

A former assistant U.S. attorney agreed the defense has an opportunity to question why Smith ultimately went back to the company, signed the documents and accepted the position.
"I don't know how that makes him look like a good guy," said Willie James Ellison, a law professor at Samford University's Cumberland School of Law. "All he's said is, 'I was corruptible.' "