Detailed as the Sarbanes-Oxley Act is, its framers could have been a tad more specific in spelling out the punishments for chief executives and CFOs who sign phony financial reports.

That's at least the argument that could be pressed in court by lawyers for former HealthSouth CEO Richard Scrushy, reportedly the first corporate executive to face charges under Sarbox. The attorneys say they're planning to challenge the act, according to Reuters.

Under Sarbox, CEOs and finance chiefs are criminally liable for knowingly certifying false financial reports. The act specifies a maximum fine of $1 million and/or a maximum prison term of 10 years for false certification. "There is a question here whether or not the criminal penalties provision of Sarbanes-Oxley satisfies constitutional standards," Thomas Sjoblom, one of Scrushy's lawyers, told Reuters, suggesting that the law could be "deemed void as vague under constitutional standards."

The threatened assault on the 2002 act didn't surprise U.S. attorney Alice Martin, the lead prosecutor on the case. "Sarbanes-Oxley is a new law and it is to be expected that there would be a challenge," Martin told the wire service.

Scrushy faces 85 charges, including conspiracy to commit fraud, filing false financial statements, money laundering, and securities and wire fraud. He's accused of defrauding the government and investors in his former company by spearheading a conspiracy to inflate earnings by $2.7 billion since 1996.

The former executive's lawyers are also trying to push back Scrushy's February 2 trial date, arguing that they need the time to adequately prepare their case. It looks like the delay has a good chance of succeeding, since trial judge Karon Bowdre's calendar is already full for June and July. Sjoblom and Martin said it now may be necessary to begin Scrushy's trial in August, according to Reuters.

Tears in the Courtroom
In other HealthSouth news, the first group of finance executives to be sentenced in connection with the company's accounting scandal seem to have gotten off lightly. The five sentencings were the first for the 15 former HealthSouth executives who pleaded guilty to various criminal fraud charges.

All five wept openly in court as they took turns begging Judge Johnson for mercy, according to Reuters. "I think they received a lot of mercy today," U.S. prosecutor Martin reportedly said.

Emery Harris, a former assistant controller was sentenced to five months in prison and ordered to pay $106,500 restitution plus a $3,000 fine, according to Reuters. His jail time will be followed by six months' home detention with no electronic monitoring and by three years' probation. Harris had faced the possibility of serving up to 15 years in prison.

Four other former members of the health care company's accounting and finance department were merely slapped with probation and fines. Former vice presidents Angela Ayers, Cathy Edwards, and Rebecca Kay Morgan and ex-assistant vice president Virginia Valentine, all of whom pleaded guilty to taking part in the conspiracy, were able to avoid jail time.

The four women were each sentenced to four years probation with six months home detention with no electronic monitoring and $2,000 fines, according to the wire service. Morgan, who along with Harris prosecutors say played a big role in the scheme, also agreed to pay $235,000 in restitution out of her HealthSouth stocks and options, said Reuters.

Falcon Flays Freddie
The federal agency that oversees Freddie Mac has fined the mortgage company $125 million for actions that led to its recent restatement of financials.

Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight (OFHEO), said Freddie Mac has agreed to implement corrective measures and pay the civil penalty as part of a consent order with the OFHEO. In the consent order it agreed to, Freddie did not admit or deny guilt.

The actions come as the OFHEO released a report detailing a pattern of inappropriate conduct and improper management of earnings that led to the company's recent restatement.

"A government sponsored enterprise like Freddie Mac lives on a public trust that should never be violated," said Falcon. "OFHEO will take strong action against an enterprise and responsible individuals if that trust is ever broken."

Among the findings in the OFHEO report:

• Freddie Mac disregarded accounting rules, internal controls, disclosure standards, and the public trust in its quest steady earnings growth.
  
  

• The incentive pay plans of senior executives played a part in Freddie's improper accounting and management practices.
  
  

• Weaknesses existed in every aspect of the company's accounting process.
  
  

• The board of directors was "complacent and failed to exercise adequate oversight."
  
  

• Former management showed a disdain for appropriate disclosure standards.
  
  

The report also recommended that Freddie should be required to separate the functions of CEO and chairman and to develop financial incentives for employees "based on long-term goals, not short-term earnings." OFHEO should also contemplate requiring a periodic change of the external auditors at Freddie and Fannie Mae, not just a change in engagement partner, according to the report.

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