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HealthSouth's Scrushy Indicted on Fraud Charges

Nov 4, 2003 | Wall Street Journal

An indictment against former HealthSouth Corp. Chairman Richard M. Scrushy was unsealed Tuesday, charging him with fraud.

The federal indictment, dated Oct. 29, says Mr. Scrushy falsified books, records and accounts at the health-care company.

Donald Watkins, an attorney for Mr. Scrushy, said his client will plead innocent. He said Mr. Scrushy was being processed by federal marshals in Birmingham, Ala., on the charges.

The indictment contains 85 counts. It claims Mr. Scrushy's scheme extended from the mid-1990s until this year. The government said Mr. Scrushy must forfeit homes, a yacht, aircraft, jewelry and a Lamborghini.

Mr. Watkins declined to comment on the indictment. "There's a whole group of lawyers studying it," he said.

Federal law-enforcement officials appeared early Tuesday morning at the executive's home to begin the indictment action.

The officials proceeded to park in front of the driveways leading to Mr. Scrushy's gated estate. Mr. Scrushy's wife, Leslie, who had driven away earlier, had to have the officials move their cars so she could return home. A government official declined to comment.

A Justice Department task force is expected later Tuesday to announce the indictment of Mr. Scrushy for his alleged role in a massive accounting fraud at the company he founded.

The indictment follows testimony before a federal grand jury in Birmingham from some of Mr. Scrushy's top lieutenants, these people said.

Fifteen former HealthSouth officials have already pleaded guilty to participating in a wide-ranging scheme to inflate the company's results and carry out nearly $3 billion in accounting fraud.

Mr. Scrushy's lawyers have said the fraud was organized without their client's knowledge and that he didn't participate. His legal team was summoned to meet with Justice Department lawyers in Birmingham late Monday and had no further comment Monday night.

The charges against Mr. Scrushy, 51 years old, could be the first against a chief executive of a major company under the Sarbanes-Oxley corporate-crime law enacted last year. Mr. Scrushy is expected to fight any charges at trial, which could provide the first extensive court test of the new law. Earlier this year, a former HealthSouth finance chief, Weston Smith, became the first executive to plead guilty to the charge of false certification of financial results, a new crime under Sarbanes-Oxley.

The law imposes severe criminal penalties on CEOs and chief financial officers who sign false filings to the Securities and Exchange Commission (news - web sites). When the law went into effect, Mr. Scrushy certified the accuracy of HealthSouth's financial results to the SEC on Aug. 14, 2002.

An indictment had been widely expected. In mid-March, federal agents raided HealthSouth's offices, and former HealthSouth finance and accounting executives began striking deals with the Justice Department in exchange for possibly reducing their prison sentences. According to former HealthSouth executives who have pleaded guilty, senior company officials met regularly at the behest of Mr. Scrushy to find the "dirt" to fill the earnings "hole" each quarter in order to meet or exceed Wall Street expectations and hide the company's true financial condition. These gatherings were known as the "family meetings" to those participating in the fraud.

The investigation of Mr. Scrushy and HealthSouth dates to last fall when the SEC began probing insider-stock transactions. In March, the former chief financial officer, Mr. Smith, came forward to prosecutors in Birmingham and offered details about fraudulent accounting over several years.

The alleged fraud also included four other former finance chiefs, including William T. Owens, who came forward about the same time as Mr. Smith. The circle included mainly a group of executives who had grown up in Alabama, attended school in the state and then took jobs at a company that could pay them with big salaries and stock options. At the top of the company was Mr. Scrushy, an authoritative CEO who monitored even the smallest details, such as whether bathrooms were clean at rehab centers.

After the Federal Bureau of Investigation raided HealthSouth on March 18, and securities regulators charged Mr. Scrushy and the company with civil fraud, the outside directors of HealthSouth fired Mr. Scrushy on March 31. It isn't clear what charges might be brought against Mr. Scrushy, but the investigation of HealthSouth hasn't been confined to accounting fraud. This summer, in court filings, federal prosecutors said the HealthSouth inquiry had also yielded evidence of tax fraud, obstruction of justice, witness intimidation, money laundering and public corruption.

The company itself, which nearly fell into bankruptcy proceedings, has battled back with a new, turnaround management team. However, the company faces pitfalls, including a potential indictment of the company itself, and it is negotiating with bondholders to get them to agree to new payment terms. A group of bondholders has taken steps to place the company in technical default.

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