Scrushy Lays the Blame on His CFOs

''You have to trust people,'' says former HealthSouth chief. Also: Quattrone changes horses; credit quality continues to improve; MCI, Citigroup seek better governance; beating up on the Big Board.


Richard M. Scrushy, the former chairman and chief executive officer of HealthSouth Corp, said his top financial executives were responsible for his health care company’s $2.5 billion accounting fraud.

Speaking during a segment of this week’s “60 Minutes,” Scrushy said he signed off on fraudulent accounting figures because he trusted the five CFOs who had served the company Scrushy helped found in 1984, according to the Associated Press.

Declaring that “you have to trust people,” Scrushy said that “you hire 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.”

When interviewer Mike Wallace pointed out that Scrushy was in charge, the former executive responded, “That doesn’t mean I’m a criminal.”

On Thursday, Scrushy is slated to appear before the House Energy and Commerce Committee. He is widely expected to invoke his Fifth Amendment rights against self-incrimination and thereby avoid answering questions.

The Securities and Exchange Commission has filed a lawsuit accusing HealthSouth and Scrushy of inflating earnings by at least $2.5 billion in order to meet Wall Street analysts’ forecasts. So far, 15 former employees have reached plea deals in the investigation, including five of the Birmingham, Alabama-based company’s former CFOs.

Scrushy has not been charged with a crime and predicted in the television interview that he will avoid jail time because he is innocent, according to the AP.

“There was no motive for me to destroy a great company that I built, a company that I loved, my fourth child,” he reportedly told his interviewer. “There was no reason for me to do that.”

Why did his subordinates commit fraud? “Promotions, bonuses, stock, stock options, an opportunity to make a lot of money,” Scrushy said.

Meanwhile, The Wall Street Journal reported Tuesday that nine days after the SEC began investigating possible insider-trading violations at HealthSouth, attorneys working for the company’s board of directors discovered evidence of possible shredding of documents relevant to the SEC probe.

The evidence was discovered in a room containing the files of four former executives, three of whom have since pleaded guilty to criminal charges related to accounting fraud, according to the paper, citing an October 29, 2002, internal report by law firm Fulbright & Jaworski LLP. The company had hired the law firm to do its own investigation into charges that Scrushy engaged in illegal insider trading.

Although HealthSouth handed the SEC the law firm’s report, a statement issued on October 30, 2002, said the inquiry had “uncovered no oral interview or written document” indicating that Scrushy engaged in insider trading, according to the Journal. It also did not disclose that some documents had apparently been destroyed, according to the published account.

Quattrone Changes Horses

Former Credit Suisse First Boston investment banker Frank Quattrone testified on Tuesday that on “rare occasions” he gave input into allocations of initial public offerings, but final decisions were made by another division within the company, according to Reuters.

This is a shift in testimony for Quattrone, on trial for obstruction of justice and witness tampering. Earlier in the trial, he said he had nothing to do with IPO allocations.

However, last week prosecutors trotted out evidence showing conversations between Quattrone and others about allocations of hot stocks, according to the wire service’s account.

Meanwhile, the defense rested on what was the tenth day of the trial and the last day of witness testimony.

And, over at another lower Manhattan courthouse, John Fort, a former Tyco director who ran the conglomerate before naming Kozlowski his successor in the early 1990s, said the board in 1997 voted to allow Kozlowski to make acquisitions of up to $50 million without its approval, according to Reuters.

That figure was raised to $100 million in 1999, and then doubled to $200 million the following year, Fort reportedly said under cross-examination by one of Kozlowski’s defense lawyers.

Credit Quality Continues to Improve

Although global credit quality is at a nearly four-year low, things are starting to look up.

In the third quarter of 2003, there were 161 downgrades and 80 upgrades. This means the number of downgrades exceeded upgrades by the smallest margin since the first quarter of 2000, according to Standard & Poor’s.

The rating actions affected long-term debt outstanding worth $265.1 billion in downgrades and $81.9 billion in upgrades.

While the third quarter saw 2.0 downgrades for every upgrade, in the second quarter there were 3.1 downgrades per upgrade, and in the first quarter, 4.6 downgrades per upgrade.

And the trends indicate further improvement during the upcoming periods. As of September 30, the proportion of entities listed with a negative bias declined to 27.5 percent, compared with 28.7 percent at the end of June.

Meanwhile, the proportion of entities listed with a positive bias increased to 8.4 percent, compared with 8.1 percent at the end of June, and the proportion of issuers with stable outlooks rose to 64.2 percent, compared with 63.2 percent.

Not surprisingly, then, as credit quality deterioration has eased, investors seem more interested in taking on more risk. Meanwhile, monetary conditions have remained accommodative, and signs of an economic recovery have not been accompanied by traditional inflation fears.

“All of these factors have contributed to an unusual virtuous cycle since March 2003, lifting both the bond and equity markets in tandem,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research group. “Even though the risk of a snap in this bullish phase has increased, the relatively muted pace of recovery and absence of inflationary expectations to date implies that the bond market could extend its gains for a few more months.”

Indeed, S&P said it does not anticipate a rate hike from the Federal Reserve until next year’s presidential elections or by the European Central Bank in the near term. As a result, it expects the issuance pipeline to continue to see reasonably solid activity.

MCI, Citigroup Seek Better Governance

Two major companies, including one that is desperately trying to rehabilitate itself, announced new high-profile appointments in an attempt to strengthen their corporate governance.

MCI appointed Nancy Higgins as executive vice president of ethics and business conduct and chief ethics officer, reporting to chairman and CEO Michael Capellas. She most recently served in a similar position for Lockheed Martin. Higgins will oversee MCI’s global ethics program and will be based in the company’s corporate headquarters in Ashburn, Virginia.

Citigroup named Thomas F. Rollauer as director of global compliance. He will report to Michael S. Helfer, general counsel and corporate secretary, and be responsible for global compliance for Citigroup and all of its member companies. Rollauer joins Citigroup from Deloitte & Touche, where he was the partner responsible for the firm’s bank regulatory consulting practice. Prior to that, he was with the Office of the Comptroller of the Currency in New York for 17 years, where he was the examiner-in-charge for Citibank in the early 1980s and the director of bank supervision for the Northeastern District.

In other governance news, the United States and the European Union are apparently moving closer to a compromise over the impact of the Sarbanes-Oxley Act on European auditing procedures, according the Web site for the Financial Times. The issue will be discussed in Washington this week when Frits Bolkestein, the EU’s single market commissioner, arrives for a two-day visit, said the paper.

Under one provision of Sarbanes-Oxley, foreign auditing firms must register with the new Public Company Accounting Oversight Board (PCAOB) if they audit companies that are listed on U.S. exchanges.

Beating Up on the Big Board

Pressure seems to be building for changes to the New York Stock Exchange’s time-honored specialist system.

Last week, in an article that appeared in the Financial Times, AIG chairman and CEO Maurice “Hank” Greenberg accused the Big Board’s trading system of not always serving investors in large companies like the insurance giant he has steered for decades.

In fact, Greenberg said he has complained several times to the NYSE and to previous and present specialists about the efficiency of the system in relation to AIG stock trading, including Goldman Sachs, owner of AIG’s current specialist firm.

“I believe that, in reality, specialists have not consistently been committing the capital required to maintain orderly markets in large-cap stocks,” he said. “If the specialist cannot effectively perform his role, then we need to look for alternatives including the electronic matching of buyers and sellers, with no human intervention.”

Mutual fund giant Fidelity Investments has also called for an end to the NYSE’s specialist system, arguing it should be replaced completed by an automated system.

“That’s where we inevitably want it to get,” Scott DeSano, head of global equity trading, told The Wall Street Journal.

One of Fidelity’s complaints is that the specialists trade for their own accounts at the expense of investors.

In fact, last Friday, DeSano, as well as Abigail Johnson, Fidelity’s largest shareholder and president of its investment management arm, and Eric Roiter, Fidelity’s general counsel, met with NYSE interim chairman John Reed, according to the paper. However, it did not detail the topics that were discussed.

Still, Fidelity spokeswoman Anne Crowley told Reuters, “We are saying that at this point in time there is an opportunity for the exchange to consider improving itself, making itself more effective and to promote competition and reform the rules. Considering the advances in technology, we ask if there isn’t a way to take advantage of them to improve the market structure.”

“We believe the issues of more critical importance deal with promoting competition in the NYSE’s market and reforming the NYSE’s rules governing trading,” Crowley added.

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