Law | Media

March 11, 2005

Is the Mafia Responsible?

At the HealthSouth trial, even newspaper corrections are "all in the Family."

David Goldenberg

The trial of former HealthSouth CEO Richard Scrushy has been an extremely entertaining one for court watchers, as various executives try to pass off some of the blame for the fraud perpetrated on investors by stating that Scrushy was ultimately the puppet-master behind the scam. Scrushy, in turn, is trying to prove that he knew nothing of the theft of hundreds of millions of dollars from investors. Scrushy’s defense team is trying to paint the other execs as opportunistic liars, while the execs say they are tired of being treated as scapegoats. As legal voyeurs, we get to see the principals air their dirty laundry.

When the public began to learn the extent of the executives’ deception, and the walls came tumbling down around HealthSouth’s inflated stock price, things got very personal inside the boardroom. Executives got into fistfights, cursed at one another, and threatened homicide, according to testimony. If this reminds you of the mafia, there’s a reason. The executives involved in the fleecing were known both inside and outside their group as “The Family,” and frequently made joking references to the mob. In testimony, one particular incident has come up at least twice.

At issue is a voicemail message that former HealthSouth CFO Mike Martin played for his coworkers after HealthSouth’s accounting practices were first questioned. During his own trial for fraud, Emery Harris, formerly an assistant controller at HealthSouth, said that Martin called the office late one night from his house while Harris and others were trying to complete the financial accounting at the end of the quarter. According to the transcript (see Exhibit C, page 52), Harris said that Martin told colleagues that the voicemail was from one of their investment bankers. “He let us listen to the message and he said, this is what I’m up against and this is why I asked you to do the things I asked you to do,” said Harris, adding that the banker who left the message:

discussed that it was important for him to lay down for the family and do what was right. And there were a lot of people counting on you to make things happen this quarter. We’re expecting big things, you know. If you don’t lay down for the family, you’ll get whacked.

Harris refers to the banker as “Ben” from “U.S. Warburg.” In an interview shortly afterwards, Harris’s attorney, Steven Salter, told the Associated Press that his client meant Benjamin Lorello, the head of health care banking at UBS Warburg.

That Ben Lorello, according to the testimony, would know about “The Family” and the corruption at HealthSouth is important. Lorello is a major player in the healthcare industry on Wall Street—he was paid $30 million by UBS when he switched to that company from Solomon Smith Barney. While Bill McGahan, his junior at UBS who also worked with HealthSouth, resigned in disgrace after the HealthSouth fiasco, Lorello has managed to survive by maintaining he knows nothing of the graft that was committed. He is currently a defendant in another case about HealthSouth, but, like Scrushy, he maintains that all of the theft was done by underlings.

Mike Martin’s recently finished testifying in Scrushy’s trial, and he also referred to the voicemail. A Birmingham News story recounted Martin’s testimony:

Martin also testified he replayed for numerous HealthSouth executives a 1998 phone message left for him by Salomon Smith Barney investment banker Ben Lorello, who Martin earlier said knew about on [sic] the fraud. "It was like something from a Mafia movie," Martin said of the phone message. “All about the rules and the family."

Later, though, the News issued a strongly worded correction to the article stating that Lorello was actually not named by Martin:

Former HealthSouth executive Mike Martin testified Tuesday he replayed a phone message for numerous other company executives in 1998. The message was left for him by investment banker Bill McGahan, Martin testified. The News incorrectly reported Wednesday that Martin said the message was left by Ben Lorello, another investment banker. Lorello was not mentioned in Tuesday's testimony, did not leave the phone message and was not described in earlier testimony as having known about the fraud.

Was Harris wrong? Had the News confused the testimony of the two men? Was Lorello’s name being tarnished unfairly? Gelf contacted Teresa Roberson, the court reporter for the U.S. District Court of the Northern District of Alabama, to get a look at the transcription of the testimony. Surprisingly, the News’s correction is contradicted by the transcript. The original story, naming Lorello as the man who left the voicemail, fits with the testimony transcribed below:

Q. Who did it come from?
A. It came from Ben Lorello, one of our investment bankers.

Q. So what you played was to get laughter?
A. I played that same voice mail for a lot of people. It was from a guy who was a big fan of Godfather movies, and he was imitating one of the characters out of the movie. And it was funny. I played it for my mom. I played it for everybody. I think I played it for Mr. Scrushy.

Q. We left off, and I'm going to ask you the message that you played for Mr. Harris and others that were on the phone line. What was the message?
A. It was a quote out of a Mafia movie.

Q. What was it?
A. It went something like, it's all about the rules. It's all about the family. It's all about the parameters. It's something like Jo, Jo never lays down, he never lays down. That's about all I can recall of it.

How did the Birmingham News mess this up? Newsrooms are usually very careful about getting their corrections right—it’s embarrassing to have to print a correction to a correction.

Gelf spoke with Pamela Dugan, assistant managing editor for the News. Dugan said she got in touch with Jerry Underwood, the business editor who was responsible for the correction. “He said he’d look into it,” Dugan said. “He found it very interesting.” Other than that, though, she said the News will have no comment about the correction or its origins until Underwood reviews the court transcripts. When he does, Gelf will let you know.

In the meantime, does anyone know what mafia movie Lorello was paraphrasing? Let us know in the comments below.

UPDATE: Monday, March 14. Gelf spoke with Underwood, who maintained that the corretion was right, claiming that the corrected version of the story was also in the Wall Street Journal and Bloomberg. Upon reviewing this article, though, he said that he would have further comment later today. "We're looking into it," he said. Stay tuned.

UPDATE: Tuesday, March 15. The News released a correction to the previous correction. The corrected correction states, among other things:

The correct version of events, from trial transcripts, is that Lorello left the phone message. Lorello hadn't earlier been mentioned as knowing about the fraud. McGahan didn't leave the phone message. McGahan had been described in earlier testimony as knowing about the fraud.

Got it? Tom Scarritt, the News' Editor-in-Chief, told Gelf that while he didn't know how the original correction came to be, he made sure that the corrected correction was accurate. "I'm never ok with us making mistakes," he said. "Our interest is in getting it right."

Related on the Web

• The Birmigham Business Journal expounds on the relationship between McGahan and Martin.

• A Wall Street Journal article from Nov. 2003 in which Lorello denies he knew of any improprieties.

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Article by David Goldenberg

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