- The Washington Times - Tuesday, June 28, 2005

BIRMINGHAM, Ala. - Jurors acquitted HealthSouth Corp. founder Richard Scrushy yesterday of all charges in a surprise reversal for federal prosecutors who had scored victories over a string of big-name CEOs accused of fraud.

The case against Mr. Scrushy, involving a $2.7 billion earnings overstatement at the rehabilitation and medical services chain, had been widely considered among the strongest and he was the first CEO charged under the Sarbanes-Oxley corporate reporting law.

Yet when they finished 21 days of deliberations, the jury decided to acquit Mr. Scrushy of all 36 counts of fraud, false corporate reporting and making false statements to regulators.

As the “not guilty” verdicts were read on count after count, Mr. Scrushy started crying. He pulled out a handkerchief and began wiping his eyes. After the final count, he reached around and hugged his wife, Leslie, in the first row behind the defense table.

“I’m going to go to a church and pray,” Mr. Scrushy said as he left the courthouse. “I’m going to be with my family. Thank God for this.”

Emerging from the building to cheers from his supporters, Mr. Scrushy said, “You’ve got to have compassion, folks, because you don’t know who’s next. You don’t know who’s going to be attacked next.”

Mr. Scrushy, tried in the city where he has been a philanthropist, blamed the massive accounting scheme on subordinates including all five finance chiefs who served under him at HealthSouth.

“I’m disappointed in the verdict,” U.S. Attorney Alice Martin said. She said she would ask a federal appeals court to reinstate obstruction of justice and perjury charges thrown out earlier by U.S. District Judge Karon Bowdre.

A corporate law specialist who had followed the trial was stunned.

“There was a mass of evidence against him. I certainly expected the jury to convict. I thought the prosecution could get a fair hearing in Birmingham, but that appears not to be the case,” said Larry Soderquist, director of the Corporate and Securities Law Institute at Vanderbilt University.

“I believe it was because of his very high reputation in the African-American community, and the fact the jury ended up more than half African-American,” he said.

The jury was composed of seven blacks and five whites. Prominent black attorney Donald Watkins, who hugged Mr. Scrushy as the verdict was read, had reminded the jury in closing arguments of the struggles of the civil rights era in Birmingham and Alabama and how juries helped the movement succeed. Black ministers were also visible supporters of Mr. Scrushy, who had regularly attended black churches during the trial.

“Since I can’t find a rational explanation for the verdict, I have to turn to an irrational explanation, and I fear it was such things as prominent black ministers being in the courtroom, Mr. Scrushy going to black churches after he was indicted,” Mr. Soderquist said.

In all, 15 former HealthSouth executives have pleaded guilty since 2003, when the scandal erupted publicly and drove the company to the brink of bankruptcy.

The decision came in the fifth day of deliberations since Judge Bowdre replaced a sick juror with an alternate and told the panel to start work anew. It was the 21st day of deliberations overall.

Miss Martin said she did not think the verdict amounts to a defeat for the new corporate reporting law passed by Congress to make CEOs more accountable after a series of financial books-altering scandals.

“I don’t think it says anything about the strength of the Sarbanes-Oxley act,” she said. “It will be tested again.”

Paul Lapides, director of the Corporate Government Center in the business school at Kennesaw State University in Georgia, viewed the impact on Sarbanes-Oxley differently. “CEOs should be happy about the verdict,” he said.

Disagreeing with the jury’s view of the case, he said justice still may come through civil suits that are pending.

Mr. Soderquist said the charges were highly complicated, but added: “I do not believe it was the complexity of the case that accounts for the verdict. I fear the race card explains the verdict.”

Herman Henderson, a black pastor from Birmingham who attended the trial almost daily and helped organize support for Mr. Scrushy among the clergy, downplayed the importance of the jury’s racial makeup.

“I think that’s an insult to the integrity of the black pastors,” he said.

Joel Androphy, a Houstonlawyer who specializes in white-collar-crime cases, said the evidence against Mr. Scrushy was overwhelming but prosecutors made a mistake trying him in Birmingham, rather than a distant venue such as New York.

“This was his home. … That was a big mistake,” he said.

The scandal had a devastating effect on HealthSouth, which teetered on the edge of bankruptcy for months despite once having more than 50,000 employees at 1,900 locations in all 50 states and share prices around $30.

Today, HealthSouth stock trades around $6 after being delisted from the New York Stock Exchange. Layoffs and closings reduced employment to 41,000 people at 1,380 sites.

Mr. Scrushy was Alabama’s best-known business leader at HealthSouth’s height, a high-flying, imperial CEO who dictated everything from T-shirt designs to seating in the executive dining room. He had a penchant for big boats, vintage cars and waterfront mansions.

Always a promoter, Mr. Scrushy seemed to relish TV appearances during which he touted HealthSouth stock. As a result of millions of dollars in philanthropy, Mr. Scrushy’s name was soon on roads, buildings and playing fields throughout the state, particularly in Birmingham.

But evidence showed Mr. Scrushy’s company was in financial trouble almost from the start.

Witnesses testified the conspiracy began in 1996 when, they said, HealthSouth switched from “aggressive accounting” to outright fraud at Mr. Scrushy’s direction. Transcripts from closed-door hearings showed prosecutors had evidence the scheme began years earlier, as early as 1988, but decided against trying to prove it.

The first of 15 corporate officers and mid-level accounting executives to admit being part of the scheme pleaded guilty in March 2003, when the government filed suit against HealthSouth and Mr. Scrushy alleging a massive fraud. They told agents about inserting false numbers they called “dirt” or “pixie dust” to cover up earnings shortfalls, which they termed the “hole.”

Gathering in conference rooms and offices to figure out how much fraud was needed each quarter to make it appear HealthSouth was meeting forecasts, the group even coined a name for itself: “the family.”

The Scrushy defense blamed the fraud on that group, particularly the five finance chiefs who worked under Mr. Scrushy and testified against him. One CFO, Bill Owens, came under withering defense attacks after agreeing to secretly record talks with Mr. Scrushy before both were fired.

Owens led the fraud, the defense claimed. He hid the scheme from Mr. Scrushy for years even after lower-level workers balked at continuing the fraud in mid-2002, when things began unraveling amid pressure from the new Sarbanes-Oxley act, which imposed stiff penalties for false financial statements.

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