Former HealthSouth CFO’s, convicted felons and cooperating witnesses Aaron Beam and Weston Smith have parlayed their notoriety into a second career, and found a way to make fraud pay off in the end. For followers of this story, it might be worth noting which of the conspirators have joined hands to make this ersatz fraud-fighting team. Beam rode his night-school CPA on a magic carpet ride that would make him a multi-millionaire before his small startup medical rehab company became too unwieldy for his talents and he accepted the HealthSouth fraud-laced golden parachute, and then sat it out in high-living style until the Feds came calling. And Smith was over-promoted into service only when HealthSouth was running out of fraud-aware accountants in the CFO pool. He then blew the whistle only when things became too hot after he had accepted a deal that would have allowed him to be the head of a “clean” division of HealthSouth while still being able to pocket his fraud-inflated earnings. Smith was presumably OK with the fraud until Sarbanes-Oxley kicked the legs of deniability out from under him. He also had the unenviable task of keeping his Family-member wife off the list of indicted conspirators. So he talked and cried a little bit on the stand, and now, along with Beam, he has a new career.
Their new venture is in full swing with Beam’s must-read book, the ominously titled “The Wagon to Disaster,” and he and Smith are also preaching to schools and conferences on the evils of fraud, and presumably how to make a spine materialize when confronted with the likes of a Richard Scrushy before you’ve stashed away millions in fraudulent income and the feds are pounding on your door. This site is not in the book review business, nor does it spend much time with other media, but Beam’s book is written in an oddly stilted, detached academic style that has a number of problems with grammar and diction as the voice of the ghost is often too evident in his heart-felt rendition. But we’ll slide by that and get to the content.
Although I might openly question how all $2.8 billion fell on Richard Scrushy’s head, this site has never been a Scrushy mouthpiece, nor has it been from the perspective of a friend, a family member, a supporter or an apologist, but it has always been about unraveling the shreds of truth in a complex emotional case, a case where many people were hurt in many different ways. But here’s the problem: Scrushy was mean—had a rather pronounced anger management problem. He was autocratic. He was flamboyant. He was scary or at least scared some people around him, perhaps those feeding at the trough, perhaps by those feeding at the trough. I get all that. I have met with dozens of people and fielded hundreds of emails that have regaled me with countless stories. I get it. But the problem is that these things, by themselves, give no proof of criminal responsibility. If they did, many, many corporate heads and managers—hundreds if not thousands—would be in the slammer by now. I’ve worked for some of them. The problem is that when we want the proof, when we want to know how this Master Mind of the fraud operated to pull the wool over the eyes of his colleagues, the banking world and the public, what we get are the stories: The Monday Morning Beatings, the petulant guy who acted like a spoiled brat when he got bad news, the show-off who annoyed people in Alabama when he got too big for his britches. That’s what we get.
But there’s a new document for us to take a look at, a new tome that is going to tell us what really happened up at HealthSouth and let us know how Scrushy’s silly pull the wagon thing turned into the Wagon to Disaster. First, before delving into some of the fraud era inconsistencies Beam reveals, let’s look at the charges made about Scrushy’s lifestyle that are supposed to convince us that Scrushy is an evil man who would claw to the top so he could prey on the carcasses of the ones he climbed over to get there. Beam tells us that Scrushy used money to acquire luxuries and gain access to power, he tells us this even while sprinkling the entire book with stories about the various music industry figures he knows, about how he invited the LSU coaching staff to one of his parties, about how he could be a mediocrity and live like a movie star. And most of this was done after he had pocketed the fraud money and left HealthSouth. Beam also mentions owning several homes, including a place in New Orleans’ French Quarter and “several houses” on St. George Island. He also said that he picked up two Mercedes, a Boxter, three Lexus, three BMWs, a Land Rover, a Jeep. And he slummed it by adding a pickup truck to the fleet. Pretty good for a night school CPA running a company that became too big for him to understand, much less manage. And this information is not meant to put Beam in a toe-to-toe who-sucked-the-most-out-of-the-fraud contest, but only to point out that it is a bit of a stretch to set Scrushy up on his Master Mind pedestal while various other members of the staff were doing the same thing. After the fraud commenced and Beam had left the company—ostensibly because he had a guilty conscience—he writes that he built a regulation football field in his back yard. This is a very Scrushy-esque story—the football field—and if Beam had been the fall guy instead of Scrushy, it might be on the first page of the proof-that-he-was-the-Master-Mind sheet.
Beam’s book also addresses one of the oldest of the running Scrushy themes that characterize him as the evil FraudMeister of HealthSouth. It is his philanthropic habits, and in particular, his penchant to have various entities and things named for him. This goes to the heart of the too big for his britches thing. In Birmingham, he definitely became way too big for a guy out of Selma to be carrying on and drawing attention to himself. Life has a certain order in the south and that’s not the way we do things down here. I live in Tampa, Florida and we have a baseball stadium called Steinbrenner Field and there is also a school called George Steinbrenner High School. Both Scrushy and Steinbrenner are polarizing individuals and although I will not make a one-to-one correspondence between the two of them—because there are differences—there are definitely some similarities. Beam brings out an oft-told story of the HealthSouth softball team that he outfitted with dazzling uniforms, and because they weren’t very good, he went out and brought in some college kids as ringers, paid them to hit homeruns so his team could win a few games. Mr. Steinbrenner has a ball team too. And he also likes to win. In fact, some would say Steinbrenner has diminished the game of professional baseball by paying grossly inflated salaries to marginal players in order to win some games. He also rules with an autocratic style, hiring and firing people over his whims, even forcing his millionaire ballplayers to submit to his notions about grooming. Sound a little familiar? The difference is the Yankees are still winning and people in his sphere are not in dire need of something to pin on him.
When he was doing these things—outfitting his ball team, zooming around in his speedboats—Scrushy had his detractors and people who thought he was already over-the-top, but he was also seen as the young dynamic face of a healthcare company that had the goal of changing the face of medical treatment, particularly rehab. The bankers liked it. The Board liked it. The medial liked it (as least they cheered him on for awhile). HealthSouth had a face and he was a one man promotion engine. Yes, maybe much of it was fueled by an out of control desire to hoard and display attention, maybe some of the motivations were narcissistic, but until HealthSouth descended into fraud and we needed a bad guy to explain the unthinkable, this is exactly what he was encouraged to do. There was a business practice that was particularly prevalent in the 1980s and 1990s that encouraged CEOs and corporate leaders to act very much like Scrushy did—the idea was considered part of the branding process of a product. A recently published article puts it this way: ”
In general, the corporate world needs its flamboyant visionaries and raging egomaniacs rather more than its humble leaders and corporate civil servants. Think of the people who have shaped the modern business landscape, and “faceless” and “humble” are not the first words that come to mind.”(The Economist, 11-09.)
(To be fair, it is a controversial practice but many businesses do subscribe to this branding methodology, and it was fairly commonplace in the 1980s and 1990s.) Many of the stories that later became the “proof” of his diabolical scheme to ruin his company and defraud shareholders out of $2.8 billion were once evidentiary proof that HealthSouth was a corporate flagship symbolic of the NewSouth, that it was a company of the future, that it was the new model of healthcare for active baby boomers. There are many examples of this kind of transference in the Scrushy saga, of many pieces of proof that merely add up to after-the-fact payback by some of his detractors. Over the years, I’ve heard many many stories from people who had varying vantage points of what happened at HealthSouth. Some of these were from several levels within the company, others were close to Scrushy or had dealings with his family, and these people would often tell me how they knew he was up to no good. But when it came down to the specifics, the what-did-you-see-that-made-you-know-Scrushy-was-knee-deep-in-fraud question, I would instead hear a story about a long-ago slight, about Scushy doing something outrageous at a barbeque, about him yelling at a hapless underling about some trivial detail—all things that are not necessarily admirable or likeable, but all falling short of a proof that a criminal Master Mind was at work. However, Beam once told us from the witness stand that, “Scrushy is not a man you would want to cross,” so let’s go to the latest of these tales, the new hotsheet, Aaron Beam’s book.
Beam uses a few terms to describe Richard Scrushy that were frequently used during the trial, in Birmingham. Words like brilliant and visionary and cutting-edge. He says that in the early days, when Richard gave the HealthSouth pitch to potential investors, the rooms were always filled. And the accolades came rolling in as Beam and Scrushy took their show on the road. He writes about a time when investors were salivating to be a part of this new approach to Healthcare. And against this backdrop of raging success, Beam talks about going to London where one of the bankers they were presenting to told Scrushy, “Your presentation needs work.” And Beam says that Scrushy went rather nuts, exhibiting what would eventually be his legendary anger management problem and what would eventually become one of the many “proofs” that he was behind the fraud. Now here’s the problem: If you’re a businessman (or a rockstar or an artist or you make donuts for a living) and you are out on the road and everyone loves what you do—you’re getting rave reviews—and one guy in the sea of applause is not impressed, it would seem to me that it would be settled nature to assume this guy must be an idiot, that he really doesn’t know what he’s talking about. Indeed, on the very next event that Beam says they went to, a big meeting in New York—he referred to it as “the big one”—the room full of investors was so impressed they stood on their feet and applauded. And Beam concedes that it was a herculean feat for a young company like HealthSouth to go public, but he says that “Richard pulled us through.”
And then Beam, the future convicted felon, talked about how they had all made a killing on the stock after they went public, and that they had to be careful to avoid accusations of insider trading on their windfall, but “In the end, most investors understand. They realized as my father used to say, that ‘You need a little walking around money.’” Eventually, we now know that Beam and Smith and the others are going to portray themselves as patsies, as poor hapless victims, but did you notice that the company was only just barely public, and the CFO is already walking the tightrope of the thin grey line. These are the people that Scrushy had surrounded himself with. And before Beam writes about Scrushy’s eventual wealth, his lavish accumulations and expensive lifestyle, he confides that he couldn’t wait to run out and by a Mercedes Benz. He just gave ‘em a check.
Now let’s get to the heart of the matter: Beam writes
“Richard and I were the only people who communicated with the Street. I spent much of my time with Richard discussing how we would spin everything, as events (earning releases, acquisitions, Medicaid rule changes, news about competitors, etc.) occurred it was pretty predictable which questions the Street would ask. Richard and I wanted to be sure we were saying the same thing in response to those questions.”
Now read this passage again. Slowly.
So it was all Richard who led Beam and the others down the path to fraud? For those that have followed this story closely, Beam just laid out kind of a blueprint to the fraud in that passage, as it involved press releases, acquisitions, and Medicaid rule changes. And then he goes on to say that not only were Scrushy and himself actively pushing the company toward the edge, but he says that he sincerely believed, “Many astute investors knew what we were doing and saw it as financial gamesmanship and not outright fraud. There was certainly much rationalization on our part.” This means that Beam, the CFO part of this duo, believed that the banking community knew what they were doing and that they were licensing them to do it. After all, the stocks kept accruing in value, the investors were happy and Beam could buy the things he had always dreamed of.
Now we’re back to our problem with the settled storyline, the one that has the evil Scrushy duping all of his executives and single handedly making them hatch the whole fraud plot. And it’s a big problem. Let’s review the facts: We have a company that is doing very well, that is consistently making and beating Street projections, we have a visionary and dynamic leader who has developed a penchant for the good life and has an anger management problem, we have a CFO who has spent much of his time with the CEO “spinning” things and has always been able to find a way to make the numbers work—even when he admittedly knows they’re over the edge, but he feels empowered because the banking industry knows what they’re doing. And then on one fateful day, as the spin of the oft-told Beam story goes, he tells Scrushy that the company can’t make the numbers. And Scrushy—who never wants to hear bad news—has a hard time accepting this because after all, his financial wizards have been spinning the numbers for years and they always manage to push the company ahead. The numbers have never been great but they somehow have always been able to put the right spin on them, just enough to keep the accolades coming, to keep everyone immersed in their toys and diversions, and enough to keep the company spinning long enough to fight another day. Scrushy tells him to do what he’s always done. You guys fix it. Don’t give me that we can’t do it stuff, that bad news, you guys go back there and fix it. That’s what he tells him. And why shouldn’t he? What in Beam’s behavior or anyone’s behavior around Scrushy would tell him that Beam can’t fix this like he’s always done. But if we’re telling an egregiously self-aggrandizing story, this is the moment that Scrushy went from being a brilliant visionary to the Master Mind of the fraud, it is the moment when everyone jumped off the wagon and Scrushy ended up pulling it alone. It’s a problem.
At one point, Beam breaks into some explanatory information about the inner-workings of the fraud, and how they carefully manipulated the numbers in order to not attract scrutiny. He writes: “We were careful to never disclose exactly how we calculated the numbers, as all of these weaknesses were better hidden earlier, when we began our merger activities.” In the very next paragraph, there is a slight of hand as the story he’s been telling for so long wobbles a bit while he recalls the way it actually happened. He said that when the various HealthSouth operating units prepared their budgets, “…there was a gap between what the people in the trenches said they could do and what Richard was promising the Street.” Between these two consecutive paragraphs, how did we deftly get from “WE were careful to never disclose exactly how we calculated the numbers,” to “what RICHARD was promising the Street.” Beam can’t have it both ways. In one paragraph he is part of a team that is collectively deceiving the investors, and in the following paragraph he is safely on the other side and Richard is doing it all by himself.
Let’s go back to the licensing of the fraud, the part that said it was OK to do this as long as everyone makes money. In a part of the book that was written from the first person point of view, but was supposed to have been contributed by Weston Smith because it relates to what happened after Beam left the company, he writes:
Many of the investment bankers that the company used in these deals were accommodating about this problem. They typically provided a checklist of information that needed to be gathered, and to sensitive areas Weston and the rest would say with a wink, “We can’t ask for that.” The understanding was clear: Questions that should have been easy to answer would not be asked. If the other side pushed for answers to the sensitive questions, the bankers effectively steered them away or berated them for asking those questions about such a ‘respectable’ company.
Now we have another problem and a big one. If we add it to the shortlist we’ve been building, it continues to diminish the role of Richard Scrushy as the overall Master Mind of the fraud. If his top accountants were always able to spin things just right and if the bankers colluded with them by consistently putting their stamp of approval on the company’s business practices, then how was Richard Scrushy supposed to know where the uncrossable line was supposed to be? And if he did cross it, it sure looks like he went over the line with a veritable stampede of people, including his best accountants and their investment banker partners.
If HealthSouth’s financial department—which had been spinning things for years—and the company’s investment bankers knew what they were doing and were sending signals that it was OK, couldn’t we assume that Richard Scrushy felt that the company must be doing business the way business is done? And if his lifestyle was not being reigned in by the The Board or the media or by his top advisors—and in fact was encouraged to be the over-the-top face of this dynamic young company, couldn’t we also assume that Scrushy felt licensed to behave as he did even if it meant that he was spinning toward an inevitable critical mass, the point where a fed up public was going to tie his antics to the fortunes of the company?
None of this is meant to take Aaron Beam’s and Weston Smith’s evil nemesis, and nominate him for Sainthood. Scrushy did dumb things. He made mistakes. He was often callous and cold and inattentive to his responsibilities at crucial times. In the aftermath of the fraud and through his subsequent trials, he continued to do things that appeared to be cynical pandering to various people and groups in order to improve his standing in the courts, or to the public. He had human failings. That is one Scrushyism that is immutable, undeniable. I will stop short of arguing that he was a good guy because that goes beyond the scope of this paper, and it is an assessment which is usually left to individuals to make, based on their own interactions and feelings. I know there are people who will never like Scrushy and I am not suggesting that they should. But it is his bigger than life human failings that crystallizes the mob rule mentality that made him the man that Aaron Beam says ruined his life, that made him the specter of evil. And it also made him the perfect patsy.
Richard Scrushy was the perfect fall-guy for what happened at HealthSouth. He was autocratic—even dictatorial—in his management style, he did outrageous things, he screamed at people when he didn’t get his way, he had a flat-lined ego fueled by an insatiable need for attention that would never be quenched. And his role as the BoogeyMan of fraud has grown over the years as people love to have a singular villain if only to avoid the confusion of complexity. Weston Smith tells a pretty good story in Beam’s book. He writes about an event that was supposed to have happened after what he termed an “excellent” quarterly conference call where HealthSouth reported great numbers even though Beam says the actual numbers were “dreadful.” At the end of the meeting, the story goes that Scrushy stayed behind and asked Bill Owens and Weston Smith, “OK, what really happened this quarter?” The funny thing about this story is that for some reason Weston Smith neglected to tell it when he was spending almost four days on the witness stand, under oath. Could he have been embellishing the Scrushy Saga as the years have gone by? And as there are books to write and new careers to launch? It is unlikely that this embellishment was an oversight by Weston Smith, the witness, because he was not all that great of a witness for the prosecution, saying that he rarely spoke to Scrushy because although he was the CFO, he reported to Bill Owens. (Owens spent eleven days on the witness stand, and didn’t mention this story either.) His usual line was that he assumed that Scrushy knew. It would have been a marvelous and welcome addition to the prosecution’s case if Smith could have related this clear and convincing snippet that demonstrated that Scrushy knew the numbers being reported were bogus. But he didn’t. Not until now.
In the final analysis, Scrushy looks like a lot of us, only bigger than life, only he was once successful enough to be the fall guy for the ungraspable realities of a banking industry out of control, of an economy on the brink, of a company carrying the banner of the New South that was too good to be true. Or perhaps he was the weak titular head of a company who was presiding over the storm of greed swirling below and around him, populated by people who were only too happy to feed his illusions that all the signs and pictures meant something, and that he was a very successful businessman. We can’t get at those things—too deep, too complex—but we can always dredge up our favorite Scrushy story—Aaron Beam just wrote a whole book of them.
Now that I’ve lost the few remaining friends and supporters I had, I might as well mention that I am working on a new project coming soon from a courtroom near you…if you’re interested, the website home of that project is: here (It all goes to Chicago.)