Regulation

A Challenge to Sarbox Constitutionality

Attorneys for former HealthSouth CEO Richard Scrushy maintain that Sarbanes-Oxley makes criminal the most ordinary and non-intentional acts of corp...
Stephen TaubApril 7, 2004

Attorneys for Richard Scrushy, the former chief executive officer of HealthSouth Corp., on Monday asked a judge to throw out 78 of the 85 criminal charges against their client.

They are also challenging the Sarbanes-Oxley Act, calling it vague and its use in this case unconstitutional, according to Reuters.

So far, 17 former executives have pleaded guilty to a number of fraud charges for their roles in the company $2.7 billion accounting scandal. Scrushy is the only HealthSouth executive to plead not guilty on all counts.

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Scrushy’s attorneys argued that most of the charges were flawed because the government artificially piled on 85 counts for basically the same offense — one alleged accounting fraud carried out in different ways. “An intellectually honest approach to the government’s own allegations would have resulted in just eight counts,” stated the lawyers in a filing.

They claimed that the 85 counts can be broken down this way: count 1, conspiracy; counts 2 and 3, securities fraud; 4 through 21, wire fraud; 22 through 41, mail fraud; 51 through 70, money laundering; and 71 through 85, criminal forfeiture.

Prosecutors filed 85 counts, said Abbe Lowell, one of Scrushy’s attorneys, in a statement, to “create the illusion that Mr. Scrushy has done far more than there is any evidence to support, and to encourage improper jury compromise by throwing so much spaghetti against the wall that it hopes some of it will stick.”

In a separate filing that argued for the dismissal of another count, Scrushy attorney Thomas Sjoblom argued that the part of Sarbanes-Oxley being used by the prosecutors against the former CEO violates basic constitutional law. The reason? It makes criminal the most ordinary and non-intentional acts of corporate officials, maintained Sjoblom — like signing their name to lengthy SEC reports prepared by others, when the statute fails to specify the state of mind required and the conduct proscribed. (“State of mind,” you may recall, was a sticking point for Juror No. 4 in the recent Tyco trial.)

“Section 906 of Sarbanes-Oxley imposes criminal liability on a corporate officer who certifies that his company’s periodic reports comply with certain specific reporting regulations imposed by federal securities law, regardless of whether violations of those very regulations would give rise to criminal liability in their own right,” added Sjoblom. “And, to make matters worse, corporate officers face liability for inaction, i.e., for not signing the required certification, even if the underlying financials are precisely accurate.”

The motion also argued that the act is an enigma for the average person.

“Several of the provisions of Sarbanes-Oxley…are so vague that they fail to provide ordinary people with an understanding of what conduct is prohibited and place no limitation on the discretion of government officials to curtail arbitrary and discriminatory enforcement,” wrote defense attorneys.

For example, whether the SEC report “fairly presents,” the information, or even “fairly presents, in all material respects,” may lie in the eye of the beholder, added the attorneys. Sarbanes-Oxley, they continued, “is unconstitutional as being so vague that no corporate officer can possibly know what actions he or she can or cannot take without risking going to jail for up to 20 years.”

In December, when the possibility was first raised that Scrushy’s attorneys would challenge the 2002 act, U.S. attorney Alice Martin wasn’t surprised. “Sarbanes-Oxley is a new law, and it is to be expected that there would be a challenge,” said Martin, the lead prosecutor on the case, according to Reuters. In response to the current challenges, Martin told wire services only that “we will be reviewing the filing and will respond at the appropriate time.”

Scrushy’s trial is scheduled to begin August 23 before U.S. District Court judge Karon Bowdre in Birmingham, Alabama, where the health-care company is based.

In a related matter, an Alabama judge last week gave HealthSouth more time to hammer out an arrangement with its creditors for the repayment of bonds, according to Reuters. Judge Allwin Horn III of the Jefferson County Circuit Court said that he wants the company and the group of creditors to bring their plan to him by April 7, reported the wire service, and that he would make a decision by April 14.

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