Ousted CEO faces 85 counts, remains defiant

HealthSouth's founder is named in a scathing indictment.

By Katherine Vogt, amednews staff. Nov. 24, 2003.

Faced with a long list of criminal charges that puts him in the same league as the nation's most infamous corporate bad boys, ousted HealthSouth chief Richard M. Scrushy stepped up and firmly declared his innocence.

On the same day federal prosecutors revealed an 85-count indictment alleging he masterminded a $2.7 billion fraud at the outpatient services giant, Scrushy used his Web site (www.richardmscrushy.com) to tell his side of the story.

Scrushy charges fall under new CEO accountability law
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"As I have said from the outset, I am an innocent man. I am deeply disappointed to have my innocence questioned and contested; however, I now embrace the opportunity to clear my name. The truth will emerge as I am able to confront my accusers and prove my innocence before a jury of my peers and the watchful eyes of our public," the Nov. 4 posting said.

The rebuttal adds to Scrushy's persona as a confident businessman who hasn't shied away from the public eye since he transformed his idea for an outpatient rehabilitation services company into a health care empire. But his persona and reputation are threatened by scathing charges that make him seem more like a corporate villain than a former respiratory therapist who worked hard to build his dream company.

The indictment paints a picture of Scrushy as a leader who controlled his employees through intimidation, directing them to falsify financial statements so HealthSouth's stock would perform well, affording him a lavish lifestyle that included a yacht, luxury cars and expensive jewelry.

Filled with charges ranging from conspiracy to securities fraud, the indictment was returned by a grand jury and revealed on Nov. 4. Scrushy surrendered to authorities and pleaded innocent to the charges in U.S. District Court in Birmingham, Ala. He was released on $10 million bond and ordered to wear an electronic monitoring device. A trial date was set for Jan. 5, 2004.

Trial has been set for Jan. 5, 2004.

Legal experts say Scrushy will have to put up a strong defense to counter testimony against him, which is expected from at least some of the 14 former HealthSouth executives who have pleaded guilty to criminal charges and are cooperating with prosecutors. They also say the scope and severity of the allegations, which puts the HealthSouth scandal in the same class as the corporate wrongdoing alleged at Enron, WorldCom and Tyco, present a difficult challenge for Scrushy to overcome.

"If the facts are as they are alleged, it's going to be an uphill battle for him," said Robert Stauffer, a Chicago attorney who specializes in health care and white-collar criminal law.

Ever since the scandal broke in March, physicians who do business with HealthSouth have said they noticed little fallout from the company's woes. Indeed, HealthSouth's operations have continued uninterrupted, and the Birmingham-based company has so far avoided a bankruptcy filing despite having debt of more than $3 billion.

Scrushy was fired from the company in March, and he has not been involved in meetings, even though he's technically still a board member because his term has not run out. He invoked his Fifth Amendment right against self-incrimination when he appeared recently before a Congressional committee investigating HealthSouth. But he did proclaim his innocence in an interview on "60 Minutes." And he's telling his side of the story on his Web site, which offers a biography, letters from supporters and comments from his legal team.

After the indictment was announced, Scrushy's attorneys, Thomas Sjoblom and Donald Watkins, issued a joint statement asserting his innocence. "Mr. Scrushy did not know about this financial fraud carried out upon the company he founded until the FBI raid last spring. These crimes were carried out by people who did this without his knowledge or direction," they said.

But the indictment says Scrushy not only knew of the fraud, he orchestrated it. Since 1996 he and his accomplices allegedly conspired to inflate HealthSouth's earnings by making fake and fraudulent entries into the company's books. To cover up that fraud, they also allegedly made false financial filings and statements, according to the indictment.

The indictment also alleges that Scrushy threatened and intimidated employees into complicity. And to further control his accomplices, he allegedly offered them large compensation packages and other incentives.

Scrushy himself also netted handsome earnings from HealthSouth, receiving nearly $267 million in compensation from 1996 through 2002, including stock options valued at more than $200 million, the indictment said.

The indictment charges Scrushy with conspiracy; mail, wire and securities fraud; false statements; false certifications; and money laundering. If convicted of all counts, he could face fines of more than $36 million and a maximum sentence of 650 years in prison.

In addition to the criminal charges, the indictment seeks forfeiture of nearly $279 million in property that Scrushy allegedly obtained from proceeds of the fraud. The items include several residences, a 92-foot yacht named "Chez Soiree," aircraft, diamond jewelry, a Rolls Royce, a Lamborghini and paintings by Picasso, Renoir and Chagall, among others.

Stauffer said the details of Scrushy's lavish lifestyle outlined in the indictment may help prosecutors make a point about how the proceeds of the fraud were used. "In the government's eye, that makes it all the more egregious," he said.

Stauffer and other legal experts say the case marks another example of a government crackdown on corporate crimes, particularly in accounting scandals and health care fraud.

"The days of these guys getting off are over. It's not that they're being made examples of, it's that they've been getting off for so long," said Lawrence Mitchell, a professor at George Washington University School of Law in Washington, D.C. "This is what we call justice. If the guy committed a crime, he belongs in jail."

Anthony Pacheco, a white-collar criminal defense attorney based in Los Angeles, said he expects a long trial with little chance of any plea deal.

"There are going to be a number of witnesses and a substantial number of documents that both sides will have to marshal through," he said. "It will play out for a long time."

ADDITIONAL INFORMATION:

Scrushy charges fall under new CEO accountability law

Legal experts say the criminal indictment of former HealthSouth chief Richard M. Scrushy provides a test case for a recently enacted law aimed at holding corporate officers accountable for fraud at their companies.

Scrushy is believed to be the first chief executive officer charged under the Sarbanes-Oxley Act of 2002, which requires chief executives to certify their company's financial statements, asserting that the facts in the statements are true to their best of their knowledge.

Though the executives cannot be expected to know every detail of their company's finances, the act is "imposing on you a duty to inquire, investigate when there are potential problems out there and to have an adequate compliance plan to turn up any other misconduct that might occur," said Robert Stauffer, a Chicago attorney who specializes in health care and white-collar criminal law.

Prosecutors allege that HealthSouth's earnings were fraudulently inflated by nearly $2.7 billion at Scrushy's request, even though he signed off on financial statements filed with the Securities and Exchange Commission.

"It's a watershed case in many ways," said Anthony Pacheco, a defense attorney based in Los Angeles and specializing in white-color crime. "It is really a defining moment for that act to prosecute alleged white-collar criminals."

Depending on the outcome of the case, Pacheco added, the government may be encouraged to use the act in prosecuting future cases, or might shy away from it.