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Ex-CEO Cleared in $2.7-Billion Fraud

Prosecutors suffer a setback after a string of high-profile convictions of business figures.

June 29, 2005|Thomas S. Mulligan | Times Staff Writer

A federal jury in Birmingham, Ala., on Tuesday acquitted HealthSouth Corp. founder Richard M. Scrushy of all charges in a $2.7-billion accounting fraud at the healthcare chain, delivering a stinging setback to the government.

After a string of high-profile convictions of business figures -- including former WorldCom Inc. leader Bernard J. Ebbers and media tycoon Martha Stewart -- the government stumbled in its first major prosecution of a chief executive under the 2002 Sarbanes-Oxley corporate reform law.

On its 21st day of deliberations, and the fifth day after an alternate replaced an ailing juror, the Birmingham jury rejected all 36 felony counts against Scrushy, a celebrity in local business, philanthropic and evangelical Christian circles.

The jurors said they had misgivings about the credibility of key prosecution witnesses, including five former HealthSouth chief financial officers who pleaded guilty in the fraud and testified that Scrushy had encouraged them to falsely inflate the company's earnings.

Jurors also cited the lack of a "smoking gun" definitively linking Scrushy to the fraud.

Former federal prosecutor Steven R. Peikin called it a "devastating blow to the government" that, over the objections of prosecutors, local federal judges had meted out light, non-prison sentences to some of the cooperating witnesses.

Defense lawyers hammered away at that point during the trial, at one point sarcastically asking former CFO Michael Martin whether, during his six months of home confinement, he was sleeping in his own bed and enjoying his big-screen TV.

Legal experts not involved in the proceeding said the government's case also might have been hurt by its complexity and by the difficulties of prosecuting a well-known figure in his hometown.

Given these hurdles, the acquittal should not be viewed as a repudiation of the Sarbanes-Oxley reform law, said John Coffee, a securities law professor at Columbia University. The law, passed in response to the collapse of Enron Corp., requires chief executives to personally attest to the accuracy of corporate financial statements.

Even so, the acquittal was a rare setback for government prosecutors. In addition to Ebbers and Stewart, the string of recent convictions has included John Rigas, founder of Adelphia Communications Corp., and his son Timothy, former Tyco International Ltd. CEO L. Dennis Kozlowski and his deputy Mark Swartz, and former star investment banker Frank Quattrone.

For Scrushy, 52, conviction could have meant spending the rest of his life in prison and forfeiting $279 million in assets. The charges against him included conspiracy, securities fraud, wire fraud and money laundering. He also was cleared of one count of knowingly signing off on false financial statements, a provision of the Sarbanes-Oxley law.

"God is good," Scrushy declared at a news conference in sweltering heat outside the courthouse after the verdicts were read around noontime.

He was joined on the sidewalk by his third wife, Leslie Scrushy, his beaming legal team and a crowd of supporters, including Bishop Jim Lowe, pastor of Guiding Light Church, a predominantly African American congregation that Scrushy joined after being ousted from HealthSouth in 2003. Scrushy himself was ordained last year as a nondenominational Christian minister.

Describing his ordeal as "two years of torture," Scrushy asked: "What happened to the compassion in this world?"

Scrushy has contended that the accounting fraud was perpetrated by subordinates without his knowledge. Despite his acquittal, the company says he will not be welcomed back as an executive.

U.S. Atty. Alice H. Martin, the chief prosecutor, shook hands with Scrushy in the courtroom after the verdicts and they exchanged brief words.

"He said I was a nice person and he knew I was just doing my job," Martin said in a telephone interview. "I said, 'Thank you, sir.' "

Martin said she was "obviously disappointed" by the verdicts. "We thought we had strong evidence with the testimony of five CFOs and [audio] tapes in which Mr. Scrushy indicated that he knew all was not right with the financial reports," she said.

Based on discussions with jurors after the verdict, Martin said: "It appears that they judged the credibility of the CFOs harshly," partly because of the light sentences some of them received.

"It was a gift to us," defense lawyer James W. Parkman III acknowledged in a phone interview Tuesday. "We were able to argue to the jury that they were in bed with the prosecution."

A federal appeals court recently vacated several of the sentences, including Michael Martin's, as unreasonably lenient, but that was well after the case had gone to the jury May 19.

Early in its deliberations, the jury seemed to be heading toward a mistrial. Jurors repeatedly sent notes to U.S. District Judge Karon O. Bowdre declaring themselves deadlocked on one or more charges.

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