THE CON: More than a dozen top execs at HealthSouth, including founder Richard Scrushy, were accused of cooking the books to the tune of $2.7 billion. Though more than a dozen former employees pleaded guilty – and several testified about his role in the fraud – Scrushy maintains his innocence.
THE DAMAGE: HealthSouth stock plummeted from $30 to $6 a share, causing shareholders to lose millions.
THE OUTCOME: After a dramatic trial complete with a last-minute change to the jury, Scrushy was acquitted on 36 charges of fraud. He’s currently serving a 7-year prison sentence on unrelated federal bribery charges. In June 2009, Scrushy lost a $2.9 billion civil suit filed by HealthSouth shareholders.
In 2003, the feds came after HealthSouth, charging more than a dozen top executives, including founder Richard M. Scrushy, with orchestrating a $2.7 billion fraud. The HealthSouth indictments were the first to follow the passage of the Sarbanes-Oxley Act, federal legislation that tightened corporate accounting rules as a response to the public outrage over scandals at Enron, WorldCom, Tyco and Adelphia. But, unlike those cases, the HealthSouth charges did not result in significant prison sentences. Of the more than dozen HealthSouth executives who pleaded guilty, only a handful served just a few months. Scrushy, who insisted that the HealthSouth books were cooked without his knowledge, was acquitted of all charges.
Scrushy founded HealthSouth in 1984 and grew it to become the nation’s largest chain of surgery and rehab clinics. Headquartered in Birmingham, AL, HealthSouth employed 50,000 people in more than 1,500 clinics located in every U.S. state and abroad.
But, according to former financial officer William T. Owens – who testified for the government during Scrushy’s trial – the picture changed in mid-1996. Owens testified that earnings projections were “several million dollars short," in spite of the company’s history of “aggressive accounting.” Owens said that Scrushy’s instructions were clear and unmistakable: “Go back and fix the numbers to meet expectations of the Street.”
Half a dozen former officers testified against Scrushy, describing him as the person who orchestrated the fraud. In their testimony, execs said HealthSouth employees who participated in the tricky accounting from the start referred to themselves as “the family.” Over time, they said, the fraud grew until it was run by what one witness called “an army of accountants” who made false entries.
As founder and CEO, Scrushy took home as much as $267 million in salary, bonuses and stock options. Aside from the connection between Scrushy’s earnings and how HealthSouth performed, those who testified against him said he took an active role in every detail of the company’s operation – from what was served in the cafeteria to who was hired or fired. Some employees said he used threats, intimidation and pay-offs to keep the fraud afloat.
In March 2003, the Securities and Exchange Commission filed charges against Scrushy and others at HealthSouth. The Government froze Scrushy’s assets and sought to obtain, among other things, his $10 million mansion, two airplanes, 92-foot yacht, paintings by Picasso and Renoir.
From the start, Scrushy blamed the fraud on those beneath him on the totem pole. During the course of his trial, it might have appeared that the Government had a strong case against Scrushy, with a half dozen former CFOs serving as witnesses for plea agreements. Along with the testimony of William T. Owens, the jury heard a conversation he secretly recorded before Scrushy’s arrest in which the CEO asked, “You’re not wired, are you?”
Along with compelling witnesses, the Birmingham trial featured a lively audience – many of whom showed up to lend vocal support to Scrushy. After his legal troubles began, Scrushy started an evangelical Christian talk show and began attending a predominantly black church. During his 5-month trial, a group of preachers made such regular appearances, an area in the audience became known as “Scrushy’s Amen Corner.”
Later, Pastor Herman Henderson alleged that Scrushy hired him to bring black pastors to the trial and oversee a public relations effort, including placing favorable articles in black newspapers. In a 2006 article in BusinessWeek, Scrushy insisted that he gave Henderson $15,000 for a charity project.
No matter the influence of the Amen Corner, the jury was deadlocked at the conclusion of the trial. After one juror became ill, an alternate was called in and a decision was reached five days later. Scrushy was acquitted on each of the 36 fraud charges.
He resigned from the HealthSouth board in 2005. The following year, Scrushy was back in court, this time in a bribery case involving former Alabama governor Don Siegelman. He was convicted for making $500,000 in contributions to the state lottery in exchange for a seat on the hospital licensing board.
Scrushy, who is serving almost seven years in prison, settled with the SEC in 2007. Without admitting to any role in the fraud, Scrushy agreed to an $81 million settlement with the SEC; this is third largest settlement in U.S. history, after those of Michael Milken and Ivan Boesky.
In late spring 2009, an Alabama state judge ruled against Scrushy in a civil lawsuit filed by HealthSouth shareholders. In sharp contrast to his long and dramatic criminal trial, the civil trial lasted just two weeks and included a single appearance by Scrushy. The judge, who determined that he was the "C.E.O. of the fraud," ordered Scrushy to pay shareholders $2.9 billion. A lawyer for the shareholders told the New York Times that Scrushy was thought to have $275 million in assets in 2005.