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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,“ Owens said.

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 analysts asap. I have received calls about your in-subordination 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 HealthSouth executives who have pleaded guilty. He is expected to testify against Scrushy.

In other legal news:

Richard Scruggs, a lead attorney in the national class-action litigation commenced on June 17, 2004, against nonprofit hospital systems and hospitals for their alleged improper and discriminatory practices with respect to uninsured patients, reported that the litigation is launching a second major legal offensive through the filing of class action lawsuits in state courts.

This second legal front will be waged on a parallel track to the legal actions now underway in federal courts against the same nonprofit hospitals and will include new state lawsuits against nonprofit hospitals that have not yet been named in the litigation.

At present, the litigation against nonprofit hospital systems and hospitals names a total of 68 cases in 23 states, involving 60 nonprofit hospital systems. Of these cases, 43 are pending in federal courts and 25 are in state courts.

“The more we pursue our litigation against the defendant nonprofit hospitals, the more disturbing the crime scene becomes,“ said Scruggs. “It is clear to us that the wrongdoings the defendant nonprofit hospital systems and hospitals are perpetrating on the uninsured involve clear violations of both federal and state laws. Accordingly, we will now vigorously move against nonprofit hospital violators in the state courts in addition to federal venues.“

Scruggs said that under state laws, uninsured patients have been victimized by nonprofit hospitals, through illegal acts in areas such as consumer fraud; breach of contract; deceptive business practices; unfair and predatory debt collection practices; and breach of usury limits.

“For years, these wrongdoers have tried to stay under the radar screen of justice through different community public relations ploys while engaging in schemes to enrich themselves and their managements at the expense of the very communities they allegedly serve and particularly off the backs of uninsured patients,“ he said.

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