Scrushy Gets Walk

The HealthSouth founder and former CEO is acquitted on all charges he faced.
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Updated from 2:01 p.m. EDT

Richard Scrushy, the onetime respiratory therapist whose single-minded drive built

HealthSouth

(HLSH)

into a national power before it fell apart in an accounting scandal, was acquitted of fraud and conspiracy charges Tuesday by a federal jury in Birmingham, Ala.

In its 21st day of deliberation, the jury found Scrushy innocent of all 36 criminal charges relating to the accounting scandal that unraveled HealthSouth three years ago. The case was the first in which a major corporate executive was tried under the Sarbanes-Oxley law concerning corporate governance.

The acquittal is a stinging defeat to federal prosecutors who recently won marquee cases against corporate wrongders at

Tyco

,

Adelphia

and

WorldCom

. For now, Scrushy, 52, will preserve hundreds of millions of dollars in cash and property derived from the sale of HealthSouth stock.

"I'm shocked," said Andrew Stoltmann, an adjunct professor at Northwestern University School of Law and a securities attorney. "This verdict is the equivalent of O.J. Simpson, only it's for Wall Street."

The former CEO still faces

Securities and Exchange Commission

civil charges in a separate proceeding.

In a brief appearance after the verdict was read, Scrushy thanked God, his family and his lawyers, in that order.

"We went from 85 counts to zero," Scrushy said, referring to the original indictment against him. "I have a lot to say that I won't say. There are a lot of wrongs that need to be made right, and I'm looking forward to seeing that happen."

Scrushy stood accused of orchestrating an elaborate accounting fraud that generated $2.7 billion in bogus profits over a seven-year period. He faced up to 20 years in prison for every violation of that law.

More than a dozen former HealthSouth finance executives pleaded guilty ahead of Scrushy's trial, which began in late January and led to jury deliberations that stretched out for weeks. At least one legal expert predicted long ago that the case would go all the way to trial and speculated that Scrushy would have a tough time going free.

"If you take a complicated case to trial, many, many things can happen," former federal prosecutor Alan Lieberman told

TheStreet.com

more than a year ago. "But I must tell you, I don't think I've ever seen a white-collar case with five CPA/CFOs testifying

against the defendant. It's going to be very difficult to make all of them out to be liars."

But that's apparently what happened, as Scrushy's legal team spent weeks heaping derision on the witnesses against him. Meanwhile, Scrushy mounted a parallel publicity campaign, hosting a religious talk show on a local television station and switching churches to a downtown Birmingham congregation known as Guiding Light.

Stoltman said the Selma native played to local perceptions that he was a local boy made good, only to face the wrath of jealous Northerners.

"The No. 1 reason Richard Scrushy is not spending the rest of his life in prison is because this case was tried in Alabama as opposed to New York or virtually anywhere else in the country," Stoltmann said. "It's no different than if Brett Favre faced a criminal trial in Green Bay. What do you think the odds of a guilty verdict there would be?"

Scrushy stuck to his claim that his subordinates carried out the accounting scheme at HealthSouth without his knowledge, hurting him -- along with other shareholders -- in the process. But the government portrayed Scrushy as the captain of a long-running game that, if anything, some of his colleagues never wanted to play.

To be sure, Scrushy cashed in during the scheme. He sold $25 million worth of HealthSouth stock -- or half his stake in the company -- just ahead of an earnings warning that sent the shares plunging. The

Securities and Exchange Commission

would later claim that HealthSouth contrived the sudden earnings shortfall to bring Wall Street's expectations down to the company's real earnings potential, sparing uncomfortable officers from certifying false financial statements in the future.

Still, the earnings-manipulation scheme -- allegedly hatched when HealthSouth first went public -- did not end before Scrushy and the company's CFO certified 2001 financial statements that overstated income (before income taxes and minority interests) by 4,700%, according to the SEC. That very year, the agency calculated, Scrushy collected more than $15 million in salary and bonuses based in large part on his company's ability to meet financial targets.

After Scrushy's ouster in 2003, HealthSouth went on to hire an HCA veteran -- Jay Grinney -- as its CEO and has since moved toward a miraculous recovery. Just one day before the jury reached its verdict, in fact, the company achieved an important milestone when it filed long-awaited historical financial statements. That filing showed that HealthSouth actually earned $1.23 billion less between 2000 and 2002 than the company had originally reported.

Even so, Balaji Gandhi -- one of few analysts who follows the company -- saw reason for optimism in the filing. He highlighted bright spots in the report, such as a $295 million income tax receivable, a rate of days' sales outstanding that remains in line with that of others in the group, and aggressive cost reductions and non-core asset sales that have brought in more than $270 million.

Moreover, Gandhi sees the potential for additional sales -- and, in turn, a stronger financial position -- going forward.

"HealthSouth has received inquiries from parties interested in acquiring its diagnostic division," Gandhi wrote on Monday. "We think an important consideration in management's decision to divest any material asset from their portfolio would be whether the transaction would help de-leverage the company."

HealthSouth ranks as one of the largest providers of outpatient health care, including diagnostic services, in the country. Gandhi has an overweight rating on HealthSouth's stock and points to this week's regulatory filing as a major step forward in the company's turnaround.