VideoThe Justice Department Tuesday indicted former HealthSouth Corp. CEO Richard Scrushy on 85 criminal counts "stemming from a wide-ranging scheme to defraud investors, the public and the U.S. government about HealthSouth's financial condition."
Scrushy, who surrendered at FBI Headquarters in Birmingham, Alabama, is accused of overseeing a scheme to deliberately inflate HealthSouth's earnings and assets by roughly $2.7 billion over several years. He becomes one of the highest-ranking corporate executives to be indicted since the recent wave of scandals began about two years ago with the bankruptcy of Enron Corp.
The indictment was returned by a federal grand jury in Birmingham last Wednesday and unsealed Tuesday morning, said the Department of Justice. It charges Scrushy with conspiracy; mail, wire and securities fraud; filing false statements and false certifications; and money laundering.
If convicted of all charges, Scrushy faces a possible sentence of 650 years in prison and more than $36 million in fines. The indictment also seeks forfeiture of more than $278.7 million in property that Scrushy derived from proceeds of the alleged offenses, including several residences, boats, aircraft, and luxury automobiles.
"Richard Scrushy and his accomplices lied," said Assistant Attorney General Christopher Wray, in a statement. "They cooked HealthSouth's books and Scrushy personally vouched for false financial statements with the SEC to cover up their scheme."
Wray then issued a warning to Corporate America: "These charges show that the government has important new tools to hold executives accountable for corporate fraud, and we won't hesitate to use them where the evidence warrants it."
Since the HealthSouth scandal broke, Scrushy has been employing what might be called the Sgt. Schultz defense — he knows "nothing, nothing."
In an interview with "60 Minutes" last month, Scrushy said he signed off on fraudulent accounting figures because he trusted the five CFOs who had served the company Scrushy helped found in 1984. When interviewer Mike Wallace pointed out that Scrushy was in charge, the former executive responded, "That doesn't mean I'm a criminal."
In its indictment, the Justice Department alleges that while Scrushy was HealthSouth's CEO and chairman of the board, he "personally participated in the preparation of financial statements and other financial documents," and that he caused HealthSouth to falsify financial statements, making the company appear more successful than it actually was.
Scrushy served as chairman of the board from 1984 through early 2003; he also served as chief executive officer during that time, except for periods in late 2002 and early 2003.
The indictment alleges that between 1996 and 2003, internal reports by HealthSouth's corporate accounting staff showed that the company routinely failed to produce sufficient net income to meet the expectations of Wall Street securities analysts, the market, and its own internal budgets — a failure that Scrushy and others allegedly referred to as "not making the numbers."
According to the indictment, Scrushy and others devised a scheme to inflate HealthSouth's earnings by making false and fraudulent entries in HealthSouth's books and records, including the income statement and balance sheet accounts — methods referred to by the co-conspirators as "filling the hole" or "filling the gap."
The Justice Department also alleges that Scrushy knowingly signed false statements to the SEC, including a false quarterly report for the third quarter of 2002, in violation of the recently enacted Sarbanes-Oxley Act.
The scheme added roughly $2.7 billion in fictitious earnings during the course of the conspiracy, according to the indictment.
Scrushy and other HealthSouth executives received salaries, bonuses, stock options, and other benefits that were tied, directly or indirectly, to the company's financial performance, the government pointed out. From 1996 through 2002, Scrushy received approximately $267 million in compensation from HealthSouth, including $7.5 million in base salary, more than $53 million in bonuses, and stock options valued at more than $206 million when exercised, noted the Justice Department.
The indictment seeks forfeiture of all gains derived from Scrushy's allegedly criminal activity, totaling nearly $279 million. They include several residences in Alabama; property in Palm Beach, Florida; a 92-foot yacht and two other watercraft; two private aircraft; diamond jewelry; several luxury automobiles; and paintings by Picasso, Chagall, Renoir, and others.
So far, 15 former HealthSouth executives, including the five CFOs who served under Scrushy, have pleaded guilty for their roles in the scheme.
Scrushy's indictment comes one day after The Wall Street Journal reported that former HealthSouth Corp. executives gave themselves and other officials company money totaling more than $500,000 to pay for legal fees before many of them pleaded guilty to defrauding investors.
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