Former HealthSouth CEO Scrushy Found Not Guilty

After 21 days of deliberation, an Alabama jury on Tuesday, June 28, 2005 found former HealthSouth CEO Richard Scrushy not guilty on all counts. The verdict comes only five days after one juror was replaced with an alternate juror forcing deliberations to begin anew. It is the first acquittal in a series of trials of high-profile CEOs accused of accounting fraud.

Scrushy initially faced 85 charges of mail fraud, conspiracy, making false statements, money laundering, securities fraud and wire fraud resulting in a $2.7 billion inflation of HealthSouth’s profit numbers. Only 36 charges ultimately went to the jury in what many observers considered the first real legal test of the provisions of the Sarbanes-Oxley Act (SOX) relating to a CEO’s certification of misleading or inaccurate financial statements.

“We went from 85 counts to zero,” Scrushy is reported by Reuters to have said after his acquittal. “There are a lot of wrongs that need to be made right and I look forward to seeing the happen.”

Scrushy maintained his innocence throughout his trial, pointing the finger instead at subordinates including five former finance chiefs who testified against him at trial. The five testified that Scrushy knew of or participated in a scheme to artificially inflate HealthSouth’s assets and earnings between 1996 and 2003. A total of 15 former HealthSouth executives have pled guilty since the scandal first broke 2003. According to Reuters, forensic accountants determined the fraud resulted in a net reduction of $3.9 billion in shareholder equity.

The effects of the scandal have been devastating on Scrushy and the company he founded. MSNBC reports HealthSouth has teetered on the edge of bankruptcy as its share price fell from around $30 to under $6, and the company was delisted from the New York Stock Exchange. On Monday, the company issued restatements of earnings for 2000 and 2001 indicating that the company had actually lost more than $650 million. Earlier this month HealthSouth agreed to pay $100 million to settle with the Securtities and Exchange Commission (SEC). Scrushy was fired after the company’s accounting irregularities became public and still faces civil charges brought by the SEC.

“Our Board of Directors declared Mr. Scrushy’s contract null and void in March 2003,” MSNBC quotes a statement from board chairman Bob May as saying. “The new Board and new management team remain appalled by the multi-million dollar fraud that took place under Mr. Scrushy’s management and the environment under which such fraud could occur. Under no circumstances will Mr. Scrushy be offered any position with the company by this management or by this Board of Directors.”

The case against Scrushy was widely considered to be among the strongest by observers.

“It appeared on the surface that the prosecution had, as far as these cases go, sufficient evidence,” Steven Peikin, a lawyer with Sullivan and Cromwell in New York who aided in the successful prosecution of Frank Quattrone told Reuters. “I can’t think of another case in which five former CFOs gave direct testimony on the defendant’s participation in the scheme. It’s a tough defeat for the government here.”

It may have been a tough defeat, but it doesn’t mean other CEOs won’t be prosecuted for violations of SOX’s corporate responsibility provisions in the future.

“We thought we presented overwhelming evidence, but the jury saw it differently,” U.S. Attorney Alice Martin, the lead prosecutor in the case told Reuters after the verdict. “Just because somebody is found not guilty of Sarbanes-Oxley doesn’t mean that it loses its teeth. It’s a good law.”

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