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Former HealthSouth Chief Arrested for $2.7 Billion Accounting Fraud

Nov 5, 2003 | AP Former HealthSouth chief Richard Scrushy was arrested Tuesday on charges of falsifying the books at the health-care chain by $2.7 billion to enrich himself the first CEO charged under a new federal law prompted by the wave of corporate accounting scandals.

Prosecutors said that because Scrushy's compensation was tied in part to HealthSouth's performance, he pocketed $267 million in salary, bonuses and stock options and surrounded himself with yachts, luxury cars, fine art and jewels.

Scrushy, 51, pleaded innocent to the 85 counts which included fraud, conspiracy and money-laundering and was released on $10 million bail secured by his three homes and 360 acres of plantation property.

Fourteen former HealthSouth employees, including all five of the conglomerate's former chief financial officers, already have pleaded guilty to fraud charges since the Justice Department began investigating the coast-to-coast chain of surgery and rehabilitation clinics in March. Another person has agreed to plead guilty.

The indictment, returned Oct. 29 and released Tuesday, had been sealed amid government claims that Scrushy's bodyguards had weapons and spy equipment that intimidated witnesses.

The charges against Scrushy carry a total of 650 years in prison and $36 million in fines, though if convicted he would get far less under federal sentencing guidelines. A trial date of Jan. 5 was set.

The charges include falsely attesting to the accuracy of corporate statements. Scrunchy becomes the first CEO charged under the Sarbanes-Oxley Act, passed in reaction to the wave of scandals that engulfed Enron, WorldCom and giant corporations.

That law requires chief executives and chief financial officers to certify their company's financial statements as accurate and holds them criminally liable for falsehoods.

The indictment seeks more than $278 million in Scrushy's allegedly ill-gotten gains, including a 92-foot yacht, a 40-foot racing boat, beach and lake homes, antique rugs and a 2003 Lamborghini. The government is also going after Scrushy's two airplanes, a Rolls Royce Corniche, a nearly 22-carat diamond and platinum ring and paintings by Picasso, Chagall, Renoir and Miro.

A self-made millionaire and philanthropist whose name adorns buildings across Alabama, Scrushy uttered only one word in court when a judge asked if he wanted to plead innocent.

"Yes," Scrushy responded meekly.

His wife and a pastor sat on a courtroom bench nearby. Former Mayor Richard Arrington of Birmingham also came in a show of support.

On his personal Web site, Scrushy issued a statement asserting his innocence.

In setting bail, U.S. Magistrate Judge T. Michael Putnam also ordered Scrushy to wear an electronic monitoring device on his ankle.

The government contends Scrushy and other executives inflated earnings by $2.7 billion from 1996 through March to make it appear HealthSouth was meeting expectations of Wall Street analysts.

Scrushy enforced discipline among participants in the conspiracy "through threats, intimidation and payoffs," and also eavesdropped on employees' telephone calls and e-mail, Assistant Attorney General Christopher Wray said in Washington.

Scrushy has blamed the fraud on others within the company.

Scrushy attorney Tom Sjoblom did not rule out the possibility of a plea bargain: "We are leaving all doors open."

In asking a judge to seal the indictment after it was returned on Oct. 29, the government said witnesses against Scrushy feared for their safety.

Members of HealthSouth's security department had assault rifles and other equipment, the government argued, and one person loyal to Scrushy took those weapons, shotguns and other guns with him when he left the company.

Defense attorneys dismissed suggestions that Scrushy had tried to intimidate anyone.

HealthSouth is the largest U.S. chain of outpatient surgery, diagnostic imaging and rehabilitation centers.

It was founded by Scrushy in 1984 and has some 50,000 employees and about 1,700 sites in all 50 states and overseas. Scrushy was ousted as chairman and CEO earlier this year as the scandal unfolded but remains on the board of directors.

HealthSouth, which has avoided bankruptcy despite the financial pressures of the fraud scandal, issued a statement saying its new management team and board have been cooperating with the criminal, civil and congressional investigations.

"While the government authorities are doing their job with regard to this case, we at HealthSouth will continue to concentrate on what we do best treating patients under our care and continuing to stabilize the company," the statement said.

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