Risk & Compliance

Judge Rules Against Scrushy over Sarbox

Fired HealthSouth chief executive's lawyers had argued that the act was vaguely worded and makes criminal the most ordinary and non-intentional act...
Stephen TaubDecember 1, 2004

Score this round to the scribes of the Sarbanes-Oxley Act. In the first court challenge against the landmark corporate governance law, a federal judge ruled against former HealthSouth chief executive Richard Scrushy, who had asserted that several charges accusing him of falsely certifying the health giant’s financials are unconstitutional, according to the Associated Press.

U.S. District Judge Karon Bowdre also ruled that jurors and not a judge should decide key questions raised in Scrushy’s case, the wire service added.

“If the jury finds that the reports did not fairly present, in all material aspects, the financial condition and results of operations of HealthSouth, the jury must then determine whether Mr. Scrushy willingly certified these reports knowing that the reports did not comport with the statute’s accuracy requirements,” she reportedly wrote.

Last year, Scrushy became the first CEO to be charged under the Sarbanes-Oxley Act for his role in the company’s $2.7 billion accounting scandal. His trial gets under way on Jan. 5.

Scrushy was first indicted last year on charges of fraud, conspiracy, and violating the Sarbanes-Oxley Act. He was then named in September on a new indictment that added perjury and obstruction of justice charges, according to the AP.

U.S. Attorney Alice Martin told AP that prosecutors were pleased with the decision, but declined further comment. Scrushy spokesman Charlie Russell said the defense wasn’t surprised by the decision, which he said will not be appealed.

The wire service said prosecutors did not immediately respond to a message seeking comment.

When he first filed his motion in April, Scrushy’s attorney Thomas Sjoblom argued that the part of Sarbanes-Oxley being used by the prosecutors against the former CEO violates basic constitutional law.

Sjoblom maintained that the act makes criminal the most ordinary and non-intentional acts of corporate officials, like signing their names to lengthy SEC reports prepared by others. It does that even though it fails to specify the state of mind required and the conduct proscribed, the lawyer argued.

“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,” Sjoblom wrote at the time. “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.”

Some parts of Sarbox “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,” Scrushy’s defense attorneys had written in prior arguments.

Although Bowdre’s decision was dated Nov. 23, Russell told the wire service the defense was unaware of the order until Nov. 29. One reason for the delay might be traced to the fact that Birmingham’s federal court is switching to a new electronic filing system, making it difficult to access documents in some criminal cases, the wire service theorized.

Interestingly, on Nov. 24 a federal judge approved a change in Scrushy’s legal team, as attorneys Abbe Lowell, Sjoblom and Scott S. Balber of Chadbourne & Parke withdrew with Scrushy’s permission, according to another AP story, citing a separate court filing.

Andrew Blum, a spokesman for the law firm, said Scrushy and the firm agreed that the lawyers could work on civil cases while Scrushy brought in an Alabama lawyer to work on the criminal case, the AP said.