HealthSouth Agrees to $100M Fine; Scrushy Jurors Remain Deadlocked

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While jurors remain at an impasse in Richard Scrushy's $2.7 billion corporate fraud trial, the company he founded, HealthSouth Corp., agreed to a $100 million settlement with the Securities and Exchange Commission.

Jurors adjourned Wednesday with instructions to resume deliberations Monday. Scrushy is accused of coordinating a scheme to inflate earnings from 1996 through 2003 and faces a 36-count indictment.

Also Wednesday, the company settled civil charges with the SEC, which sued the company in 2003, claimed earnings were overstated by at least $1.4 billion. The fine – which is far less than the penalties of more than $700 million agreed to by Adelphia and WorldCom Inc. – will be paid in five installments over two years.

"This is another cloud that's been removed from over the company and resolves another external problem," Frank Morgan, an analyst at Jefferies & Co. in Nashville, told the Chicago Tribune. "This is more evidence [Jay] Grinney and his management team are doing a good job putting to bed all the company's legal obstacles."

Grinney was hired as chief executive in May 2004. Wednesday's settlement and the company's plan to restate financial reports from 2000 through 2003 will take HealthSouth closer to having its shares relisted, analysts told the Tribune.

HealthSouth officials are also seeking to get tax refunds, saying the values of its properties had been falsely inflated for years and therefore they paid too much in property taxes, the Birmingham Post-Herald reported. The company asked Jefferson County, Ala. tax officials for a refund of $1.2 million in property taxes it paid on “fictitious assets” in 2001 alone. Jefferson County denied the claim and the state attorney general recently agreed, saying refunds were not mean to cover cases in which “the taxpayer manipulated the facts for personal gain.”

HealthSouth spokesman Andy Brimmer said, “We have 1,300 facilities. And in any jurisdiction where we may have made an overpayment due to the fraud that was perpetrated against us we will consider pursuing the process for refunds."

As for Scrushy, observers are closely watching the charge for violating the Sarbanes-Oxley Act, which requires CEOs to personally certify their company's financial statements. Charna Sherman, a partner with white-collar criminal law specialists Squire Sanders & Dempsey LLP in Cleveland, told the Birmingham Business Journal that failure to convict on the federal corporate reform law in its first trial test will undermine future prosecutions.

"It is hard to imagine Congress' intent will have any bite if the prosecution can't make (SOX) stick under these circumstances," Sherman said.

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