June 28, 2005

Ex-HealthSouth CEO Scrushy found not guilty

By Karen Jacobs

BIRMINGHAM, Ala. (Reuters) - A federal jury on Tuesdayfound former HealthSouth Corp. Chief Executive Richard Scrushynot guilty of orchestrating the $2.7 billion accounting fraudat the medical rehabilitation chain he founded.

Scrushy, 52, faced 36 charges whittled down from theoriginal 85-count indictment and was found not guilty on allcounts, including conspiracy, mail fraud, making falsestatements, securities and wire fraud and money laundering.

"God is good," Scrushy said shortly after the verdict wasread.

"We went from 85 counts to zero," he added, characterizinghis ordeal as two years of torture. "There are a lot of wrongsthat need to be made right and I look forward to seeing thathappen."

Scrushy, a local Birmingham celebrity, was among a group ofhigh-profile U.S. corporate executives who have been tried forfinancial wrongdoing in a string of accounting scandals, and isthe first so-far to be found not guilty.

Had he been found guilty, Scrushy could have spent the restof his life in jail and been forced to forfeit millions ofdollars and personal property, including multiple homes, luxuryboats and airplanes.

U.S. Attorney Alice Martin, the lead prosecutor in thecase, said she was shocked and disappointed by the verdict.

"We thought we presented overwhelming evidence, but thejury saw it differently," Martin said.

Jurors, speaking to reporters afterward, said there wasn'tenough hard evidence with Scrushy's fingerprints on it.

"The fraud was there," said a male juror. "The smoking gunwasn't."

Added a female juror: "There was reasonable doubt."

After the verdict, Scrushy hugged his wife, his lawyers andBishop Jim Lowe, pastor of predominantly black Guiding LightChurch Scrushy joined after his indictment in what some criticscalled an attempt to influence the potential jury pool.

Scrushy's case was considered to be the first importanttest of the 2002 Sarbanes-Oxley corporate reform law that setstiff penalties for executives who signed false financialstatements filed with the government.

"Just because somebody is found not guilty ofSarbanes-Oxley doesn't mean that it loses its teeth," Martinsaid. "It's a good law."

Scrushy, who never took the stand in his own defense, still faces civil charges brought by the U.S. Securities andExchange Commission in 2003. HealthSouth earlier this monthreached a settlement with the SEC under which it agreed to pay$100 million.

The Scrushy criminal case went to the jury on May 19following a trial that began on Jan. 25. But deliberationsbegan anew just last Wednesday after U.S. District Judge KaronBowdre replaced a juror suffering from recurring healthproblems with one of the alternates. The original jury hadseveral times indicated it was unable to reach a unanimousverdict only to be told by the judge to keep working.

Five former HealthSouth finance chiefs, who had all pleadedguilty to taking part in the fraud, were among the governmentwitnesses who testified that their ex-boss either knew about orparticipated in a scheme to inflate HealthSouth earnings andassets from 1996 to 2002 to prop up the company's share price.

The defense contended all along that the fraud was carriedout by Scrushy's underlings, who lied to keep it from him.

"It appeared on the surface that the prosecution had, asfar as these cases go, sufficient evidence," said StevenPeikin, a lawyer with Sullivan and Cromwell in New York whohelped successfully prosecute investment banker FrankQuattrone. "I can't think of another case in which five formerCFOs gave direct testimony on the defendant's participation inthe scheme. It's a tough defeat for the government here."

Forensic accountants working for the company's newmanagement ultimately determined that the fraud resulted in a$3.9 billion net reduction in shareholder equity.

HealthSouth on Monday issued its long awaited restatementof earnings for 2000 and 2001 that showed that instead of theprofits reported for those years the company in realitysustained more than $650 million in losses.

The company, still struggling to recover from the fraud,said the jury's verdict had no direct impact on the company.

"The new board and new management team remain appalled bythe multibillion-dollar fraud that took place under Mr.Scrushy's management and the environment under which such fraudcould occur," HealthSouth Chairman Bob May said in a statementon Tuesday.

"Under no circumstances will Mr. Scrushy be offered anyposition within the company by this management team or by thisboard of directors," May added.