A Diagnostics & Imaging Week

Top HealthSouth (Birmingham, Alabama) executives considered removing Richard Scrushy as chairman but decided against it in the final months of what prosecutors say was a huge fraud conspiracy at the rehabilitation giant, according to testimony yesterday at Scrushy's trial.

Bill Owens, who was HealthSouth's CEO at the time, testified that in the fall of 2002 he met on a Sunday afternoon with then-CFO Tadd McVay and general counsel Bill Horton. Owens said the company was under "pressure" from the outside due to Scrushy's stock transactions, which had drawn shareholder lawsuits and a government probe.

The defense previously has portrayed the meeting at McVay's home as being part of a "coup" against Scrushy, who was then HealthSouth's board chairman. But Owens said the gathering did not result in any changes.

"My position was that Mr. Scrushy should not be removed as chairman, and I expressed that," said Owens.

Prosecutors showed the jury a copy of a later e-mail in which Scrushy chastised McVay for disloyalty.

The message to McVay read: "Cease making any negative comments about me and my leadership abilities to shareholders or analyst a.s.a.p. I have received calls about your insubordination and I am taking this under consideration now. Richard Scrushy."

HealthSouth's board fired Scrushy as chairman in March 2003 after the government filed a civil suit accusing the company and Scrushy of a massive accounting fraud. Scrushy, who later was charged criminally, claims Owens and other HealthSouth executives hid the fraud from him, lying to him for years as they climbed the corporate ladder.

Owens is among 15 former HealthSouth executives who have pleaded guilty in the fraud.

In five days of testimony, Owens has portrayed Scrushy as the leader of what prosecutors allege was a conspiracy to overstate HealthSouth earnings by some $2.7 billion for seven years beginning in 1996. Scrushy wanted to keep stock prices high and made millions off the scam, prosecutors allege.

Owens testified Tuesday that Scrushy initially wanted to keep McVay unaware of the fraud so his judgment wouldn't be "clouded" in talking with potential lenders and investors. But Owens said he had to inform McVay of the fraud because so much bogus money was on the company's books.

"There were numerous problems that had to be dealt with, and yes, I did discuss these with [Scrushy]," Owens testified.

McVay requested a bonus after signing financial statements he knew were false, but Scrushy refused, according to Owens. "We weren't going to be held hostage," testified Owens, explaining Scrushy's reasoning.

Owens, who was HealthSouth's CEO and CFO at different times, said Scrushy wanted to fire McVay, but he warned against dismissing him because McVay was in on the fraud and could cause "significant problems" if terminated.

McVay, who later became CFO, is among the Health-South executives who have pleaded guilty. He is expected to testify against Scrushy.

In other legalities:

The law firm of Wolf Haldenstein Adler Freeman & Herz (New York) reported the filing of a class-action lawsuit in U.S. District Court for the District of Massachusetts, on behalf of all persons who purchased the securities of Epix Pharmaceuticals (Cambridge, Massachusetts) between March 18, 2002, and Jan. 14, 2005, against defendants Epix and certain officers and directors of the company.

Epix is a developer of targeted contrast agents designed to improve the diagnostic quality of images produced by MRI.

The complaint alleges that defendants violated the federal securities laws by issuing materially false and misleading statements throughout the class period that had the effect of artificially inflating the market price of the company's securities.

The complaint alleges that, among other things, the defendants failed to adopt and implement clinical quality management practices to deal with test and control scan problems which were ultimately responsible for difficulties in the statistical analysis and determination of efficacy of MS-325, the company's lead product under development.

The complaint also alleges that the Epix Phase III protocol for MS-325 permitted clinical investigators to substitute their own standards for MRI imaging and that those investigators were substituting their own standards for such imaging, resulting in the use of non-standard and non-uniform imaging methods to acquire the non-contrast MRA comparator control scans.

Additionally, the complaint noted that problems with uninterpretable images, multiple standards for acquisition of control scans, deficient clinical quality practices, and difficulties in the statistical analysis and determination of efficacy of MS-325 were known to defendants prior to the submission of the clinical data and results to the FDA.

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