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HealthSouth's Scrushy Indicted on 85 Counts

Nov 4, 2003 | Birmingham Business Journal

Long-running speculation as to whether HealthSouth Corp. founder Richard Scrushy would be indicted for his alleged role in a $2.7 billion accounting fraud at the Birmingham-based company ended Tuesday when the federal government released an indictment charging him with 85 counts of conspiracy, fraud, money laundering and falsely certifying financial statements filed with the Securities and Exchange Commission.

In response to the indictment, Scrushy attorney Thomas Sjoblom said his client will testify when the case comes to trial. "We have nothing to hide," he said.

The 38-page indictment "United States of America v. Richard M. Scrushy" accuses Scrushy, whom the HealthSouth board of directors fired in March as president and chief executive and dismissed as chairman, of orchestrating the scheme to boost the company's earnings and to enrich himself.

Scrushy faces up to 650 years in prison and more than $36 million in fines if convicted on all counts, according to a government press release issued Tuesday. The government also wants to seize hundreds of millions of dollars in assets that Scrushy allegedly amassed as a result of the fraud.

At a news conference Tuesday morning in Washington, D.C., U.S. Attorney Alice Martin, who is leading the federal criminal investigation, said, "this indictment sends two messages: There is one rule of law and it applies to everyone, and corporate fraud does not pay."

The government alleges the conspiracy occurred from "in or about 1996 to on or about March 19, 2003," the day after the FBI raided HealthSouth's palatial corporate headquarters in southern Jefferson County, hauling off computer hard drives and reams of documents.

According to the indictment, the federal government will demand Scrushy forfeit assets totaling more than $278 million that he derived from the alleged fraud. The assets include real estate he owns in Alabama and Florida, a 92-foot yacht, several other boats, two Cessna airplanes, diamond jewelry, luxury vehicles and 11 paintings, including works by Pablo Picasso, Marc Chagall and Joan Miro.

The indictment claims that between 1996 and the end of 2002 Scrushy received some $267 million in compensation from the company he and four other investors founded in 1984. The compensation includes "more than $53 million in bonuses and stock options valued at more than $206 million" when he exercised them.

The government claims the bonuses and options "were tied, directly or indirectly, to the financial performance of HealthSouth," and that the compensation was inflated as a result of the accounting fraud and conspiracy.

"A purpose of the conspiracy was to unjustly enrich and benefit defendant Richard M. Scrushy and others by fraudulently inflating the results of operations and the financial condition that HealthSouth reported to others," the indictment reads.

Moreover, the government alleges, "Scrushy and other co-conspirators would and did fraudulently inflate HealthSouth's financial results in order to increase HealthSouth's stock price and thereby increase the value of their own HealthSouth stock and options."

The government has won 15 guilty pleas from former HealthSouth executives, who are identified in the indictment as "co-conspirators and aiders and abetters." Among the 15 executives are all five chief financial officers since the company was founded. Terms of the plea agreements require the 15 former executives to cooperate with the federal investigation and prosecution.

The indictment charges that "[t]housands of individuals from all over the United States and many institutions, mutual funds, insurance companies and retirement systems, including the Retirement System of Alabama, purchased HealthSouth's securities," which at their height traded on the New York Stock Exchange for more than $30 a share. Those shares tumbled to less than 10 cents each as the scandal unfolded.

The NYSE earlier this year delisted the company's stock, which now trades over the counter. It closed at $2.81 a share Monday.

The government alleges that Scrushy and his underlings worked together "to devise and intend to devise a scheme and artifice to defraud and to obtain money and property by means of materially false and fraudulent pretenses, representations and promises."

The government claims Scrushy and others created fictitious earnings and "did cover up, conceal and keep secret the fraud by controlling and limiting access to HealthSouth's financial information, controlling the internal distribution of financial results, providing fraudulent documentation and false information to its auditors, providing false information to federal and state taxing authorities and fraudulently using the acquisition of other companies to conceal fraudulent assets on HealthSouth's books and in its reports."

According to the indictment, Scrushy's announcement on Aug. 27, 2002, that a Medicare reimbursement rule would cost the company $175 million in earnings through the end of that year was in fact an attempt to deflate HealthSouth's artificially high income. The government claims the fictitious income amounted to $2.74 billion from 1996 through the end of 2002.

A federal task force that included, among other agencies, the FBI, Customs and the Internal Revenue Service, coordinated the criminal investigation.

At Tuesday's news conference in Washington, IRS commissioner Mark Everson called the amounts involved in the case "a staggering sum of money."

"This money supported a lavish lifestyle which few Americans could imagine," he said.

"As alleged, instead of telling the public the truth, Richard Scrushy and his accomplices lied. They cooked HealthSouth's books and Scrushy personally vouched for false financial statements with the SEC to cover up their scheme," assistant U.S. Attorney General Christopher Wray said at the news conference. "These charges show that the government has important new tools to hold executives accountable for corporate fraud, and we won't hesitate to use them where the evidence warrants it."

Scrushy also faces civil charges filed by the Securities and Exchange Commission in March.

HealthSouth, whose day-to-day operations are being conducted by a New York-based corporate turnaround company, issued a statement after the indictment was released, saying, "HealthSouth's new management team and board have been and are cooperating actively with the (the Justice Department), SEC and Congressional investigators with regard to the fraud perpetrated against the company, its employees and stakeholders."

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