Accounting & Tax

Scrushy Acquitted on All Counts

The former CEO and his close-knit HealthSouth ''family'' were accused of recording as much as $2.7 billion of fake revenues on the company's books ...
Dave Cook and Helen ShawJune 28, 2005

Richard Scrushy — co-founder, former chairman, and former chief executive officer of HealthSouth Corp. — was acquitted by a federal jury on all 36 criminal counts against him, including conspiracy and securities fraud. The verdicts came on the 21st day of deliberations overall, and the 5th since an ill juror was replaced last week. Scrushy’s trial began in January.

Scrushy and his close-knit HealthSouth “family” were accused of recording as much as $2.7 billion of fake revenues on the company’s books over six years and correspondingly adjusting the balance sheets and paper trails. Scrushy also has the distinction of being the first CEO charged under the Sarbanes-Oxley Act of 2002 — specifically, for knowingly filing a false report with the Securities and Exchange Commission.

The SEC began its investigation into HealthSouth in the fall of 2002, not long after the Birmingham, Alabama-based health-care services provider announced that a change in Medicare billing guidance would reduce its annual earnings by $175 million. In March 2003, the SEC brought civil charges against HealthSouth and Scrushy, alleging that the company overstated its earnings by at least $1.4 billion, and Scrushy was fired from his positions as chairman and CEO.

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By November, when Scrushy was indicted on 85 criminal counts by the Department of Justice, HealthSouth’s overstatement of earnings had been pegged at $2.7 billion, and more than a dozen former finance executives (including all five former finance chiefs) had agreed to plead guilty to criminal charges and cooperate with prosecutors.

Even before he was criminally charged, Scrushy was more than willing to lay the blame on his CFOs. Shortly after indictments were handed up, defense attorney Thomas Sjoblom argued in pretrial motions that the three Sarbanes-Oxley counts against his client should be dismissed on constitutional grounds. Sjoblom maintained that Sarbanes-Oxley criminalizes nonintentional acts of corporate officers, such as signing their names to lengthy SEC reports prepared by others, even though it fails to specify the state of mind required and the conduct proscribed.

U.S. District Judge Karon Bowdre, who presided over the trial, ruled against the defense on that motion, although two of the three Sarbanes-Oxley counts were eventually dismissed. By the time the case went to the jury, 36 counts remained in place against Scrushy.

Throughout the trial, prosecutors maintained that Scrushy personally participated in the fraud, while defense attorneys claimed he signed financial filings based on the advice of subordinates and knew nothing about the wrongdoing. According to the testimony of former CFOs William Owens, Aaron Beam Jr., Michael Martin, Westin Smith, and Malcolm “Tadd” McVay — all of whom have pleaded guilty but have yet to be sentenced — each realized the error of his ways, but most felt helpless to blow the whistle or even leave the company.

Scrushy himself did not take the stand, but jurors did hear 40 minutes of conversation secretly taped by Owens in which the former CEO reminds him of the business and personal relationships that bound the HealthSouth “family” together: “If you want to go public with this,” warns Scrushy, “get ready to get fired, and everyone goes down with you.” On the recordings, Scrushy does not make direct references to fraud, but he does mention Sarbanes-Oxley, makes vague references to “cleaning” things up, and even asks Owens if he is “wired” — and indeed, Owens had already agreed to turn informant for the FBI.

On Monday, in HealthSouth’s first SEC filing since 2002, the company restated earnings downward by more than $1 billion over the two-year period covering 2000 and 2001.