[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                 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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