Analyst Witness at Scrushy Trial
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The trial of Richard Scrushy has entered the world of financial analysts. In particular, one Frank Morgan who lowered his rating on HealthSouth Corp. following a announcement from the company. Morgan who followed the company for Jefferies & Co. Inc. testified that he told investors to sell HealthSouth following an August 2002 statement. Earnings were forecast to fall $175m short of projections, due to Medicare reimbursement changes. Following the announcement, HealthSouth shares plummeted more than 40%. Seven months later they dropped following the, disclosure of the fraud allegations. The Medicare change important to the prosecution case. By vastly overstating the impact of the changes, the company's executives hoped to lower earnings estimates. This would help them end the fraud. Prosecution witnesses had previously testified that Scrushy had been in on this decision. Morgan however admitted under cross-examination that he did not know if Scrushy had been involved in the alleged $2.7bn fraud. Scrushy has pleaded not guilty to all charges relating to the alleged fraud. The prosecution case is largely based on the testimony of fifteen other executives that have already pleaded guilty. The defence lawyers pointed out in questioning that HealthSouth had grown into a Fortune 500 company. The prosecution, in the form of U.S. Attorney Alice Martin posed a question regarding those other scandalised companies. "Was WorldCom a Fortune 500 company". "Was Enron a Fortune 500 company." Judge Bowdre allowed objections and told the jury to ignore the questions. The collapses of WorldCom and Enron ironically were the trigger that led to the Sarbanes-Oxley Act 2002. Scrushy is the first CEO to be prosecuted following alleged violations of the Act.
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