FOR IMMEDIATE RELEASE|
TUESDAY, APRIL 8, 2003
TDD (202) 514-1888
FORMER HEALTHSOUTH CFO MICHAEL MARTIN CHARGED WITH CONSPIRACY TO COMMIT WIRE AND SECURITIES FRAUD
WASHINGTON, D.C. - Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division, U.S. Attorney Alice H. Martin of the Northern District of Alabama, and Carmen S. Adams, Special Agent in Charge of the FBI's Birmingham Field Office, announced today that former HealthSouth Corp. Chief Financial Officer Michael Martin has been charged with conspiracy to commit wire fraud and securities fraud, and falsifying financial information.
Michael Martin, 42, of Birmingham, Alabama, was charged in a three-count criminal information filed at U.S. District Court in Birmingham this morning. Martin is expected to plead guilty to all counts in the information at a hearing at 2 p.m. CT, and has agreed to cooperate with the government's ongoing investigation into HealthSouth's finances.
Martin served in various capacities in HealthSouth's accounting department from 1989 until October 1997, when he was promoted to chief financial officer. He served as CFO until about February 2000, when he left HealthSouth's employment.
Count 1 of the information alleges that a conspiracy existed from at least as early as 1997 until he left HealthSouth's employment, between Martin and senior officers, to devise a scheme to artificially inflate HealthSouth's publicly reported earnings and falsify reports of HealthSouth's financial condition. Martin, as CFO, William T. Owens, who was then controller of HealthSouth, and others would provide the chief executive officer with monthly and quarterly preliminary reports showing HealthSouth's actual financial results. After reviewing these reports, the CEO would direct Martin and Owens to find ways to ensure that HealthSouth's "earnings per share" number met or exceeded Wall Street analyst expectations. These instructions were passed on to members of HealthSouth's accounting staff.
After the senior officers issued instructions as to the desired earnings per share number, HealthSouth's accounting staff would meet to discuss ways to artificially inflate HealthSouth's earnings to meet the CEO's desired earnings numbers. These meetings were known as "family" meetings, and the attendees were known as the "family." At the meetings, they would discuss ways by which members of the accounting staff would falsify HealthSouth's books to fill the "gap" or "hole" and meet desired earnings. The fraudulent postings used to fill the "hole" were referred to as the "dirt."
According to the information, Martin and others made and caused to be made false and fraudulent entries in HealthSouth's books and records for the purpose of artificially inflating HealthSouth's earnings. Methods included manipulating the "contractual adjustment" or other expense accounts to artificially inflate revenue on the income statement; and making false and fraudulent entries into accounts on the balance sheet concerning Property, Plant and Equipment (PP&E), cash, inventory and intangible asset or goodwill. HealthSouth's accounting personnel designed the fictitious accounting entries to avoid detection.
The criminal information alleges that, as a result of the scheme, Martin, other senior officers and their co-conspirators made and caused to be made false and fraudulent journal entries in HealthSouth's books and records, knowing these would be reflected in the financial statements and public filings with the Securities and Exchange Commission. It was further part of the conspiracy that Martin, the senior officers and others caused HealthSouth to file publicly with the SEC annual reports and quarterly reports that materially misstated HealthSouth's net income, revenue, earnings per share, assets and liabilities during the period of Martin's involvement in the conspiracy.
In furtherance of the conspiracy, the information charges that Martin signed HealthSouth's 10-K for 1997 and 1998, and HealthSouth's 10-Q for the first, second and third quarters of 1998 and for the first, second and third quarters of 1999, knowing that each filing did not fairly present the financial condition and results of operations of HealthSouth. Martin also caused the third quarter 1999 10-Q to be transmitted by wire from Birmingham to the SEC in Washington, D.C.
According to the information, the purpose of the conspiracy was for Martin and others to fraudulently enrich themselves by artificially inflating HealthSouth's publicly reported earnings and financial condition.
Count 2 of the information charges Martin with falsifying HealthSouth's financials for the purpose of generating false reports to be filed with the SEC, in violation of 15 USC Section 78m(b)(2)(A), 78m (b)(5) and 78ff, 17 CFR Section 240.13b2-1, and 18 USC Section 2. The third count of the information seeks forfeiture to the United States of any property which constitutes or was derived from proceeds traceable to these securities violations by Martin.
"Mr. Martin's plea demonstrates you cannot leave a corporate fraud conspiracy by simply walking out the corporation's front door. Today he accepts criminal responsibility for actions which began in 1997 and ended more than three years ago," said U.S. Attorney Alice Martin. "He is cooperating with our investigation and helping supply additional information."
HealthSouth was organized under the laws of the state of Delaware, with headquarters in Birmingham. HealthSouth claims to be the nation's largest provider of outpatient surgery, diagnostic and imaging and rehabilitative healthcare services, with approximately 1,800 facilities in all 50 states, Puerto Rico, the United Kingdom, Australia and Canada. The company employs more than 51,000 workers, and was founded in 1984.
Martin is the ninth person to be charged in connection with the HealthSouth investigation, which began last month. Last week, five HealthSouth officers were charged in connection with accounting fraud, including Chief Information Officer Kenneth Livesay. Earlier in the week, HealthSouth Vice President of Finance Emery Harris pleaded guilty to accounting fraud charges. Chief Financial Officer William Owens and former CFO Weston Smith had previously pleaded guilty. All defendants charged to date in the HealthSouth case are cooperating in the government's investigation, which is ongoing and active.
The investigation is being conducted by the FBI-Birmingham Field Office, with assistance from the SEC, Atlanta District-Enforcement Division. The prosecution is being handled by U.S. Attorney Alice H. Martin and Assistant U.S. Attorneys with the White Collar Section and Asset Forfeiture Section of the United States Attorney's Office, with assistance from attorneys with the Fraud Section of the Criminal Division of the Department of Justice in Washington, D.C. The prosecution is being overseen by the President's Corporate Fraud Task Force, headed by Deputy Attorney General Larry Thompson.
Additional charges in this case are expected.