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Jury clears HealthSouth founder

Richard Scrushy was the first chief executive to face charges of violating the 2002 Sarbanes-Oxley Act.

By wire services
Published June 29, 2005

BIRMINGHAM, Ala. - HealthSouth Corp. founder Richard Scrushy walked away a free man Tuesday after a jury cleared him of all charges in a stunning setback for federal prosecutors who sought to add his name to a list of CEOs convicted of fraud.

The jury of seven men and five women rendered a verdict after weeks of sometimes rocky deliberations focused on Scrushy's role in a $2.7-billion accounting fraud at HealthSouth Corp.

The acquittal was a defeat for federal prosecutors after a string of recent business fraud convictions. It also marked a failure in the first effort to hold a chief executive accountable under a corporate accountability law passed after blowups at Enron Corp. and WorldCom Inc.

Scrushy, 52, was the first chief executive to face charges of violating the 2002 Sarbanes-Oxley Act, which requires top officials to vouch for the accuracy of financial statements.

After 21 days of deliberations, the last five with an alternate replacing a juror who fell ill, the jury acquitted Scrushy of all 36 counts of fraud, false corporate reporting and making false statements to regulators.

As the "not guilty" verdicts were read on count after count, Scrushy started crying, then reached around and hugged his wife, Leslie, in the first row behind the defense table.

"I'm going to go to a church and pray," Scrushy said as he left the courthouse. "I'm going to be with my family. Thank God for this."

Legal experts expressed surprise at the prosecution's loss, in part because the government had gathered 15 guilty pleas from other former HealthSouth executives. All five of the rehabilitation hospital chain's finance chiefs testified against Scrushy during the trial, which began Jan. 5.

"This is an astonishing result," said Washington, D.C., defense lawyer James D. Wareham. "It will change the way fraud cases are defended in certain regions of the country and will induce the Department of Justice to expand its overuse of the less defendant-friendly Southern District of New York as its forum of choice."

In a rare development for a white-collar fraud case, one insider had made secret audiotapes of Scrushy with a recording device sewn into his necktie. The tapes, made by former finance chief William T. Owens, captured Scrushy saying: "I am convinced there are 8,000 companies out there right now that's got (junk) on their balance sheets."

But defense lawyers said Scrushy never employed words such as "fraud" or "illegal" - and that no documents or e-mails produced in the course of the trial directly implicated their client. They called Owens a "big rat."

U.S. Attorney Alice H. Martin, who tried the case alongside prosecutors from the Justice Department's Fraud Section, said she was disappointed with the verdict.

Prosecutors are appealing the judge's dismissal of perjury and obstruction-of-justice charges.

Martin said she would try Scrushy on those charges if they are reinstated by an appeals court. A separate civil case against Scrushy filed by the Securities and Exchange Commission continues, as do scores of lawsuits filed by HealthSouth shareholders.

The unusual trial, which lasted almost six months, featured a judge who described herself as a "neophyte" in criminal law, highly paid defense lawyers who appealed to religion and race to backstop their arguments, and government lawyers who appeared to irritate the judge with their persistent questions.

The jury, composed of seven blacks and five whites, mostly had blue-collar backgrounds and little familiarity with business practices. Deliberations were punctuated by repeated interruptions because of illness and vacations. The jurors reported they were deadlocked June 3, but U.S. District Judge Karon O. Bowdre ordered them to continue. The judge replaced one older white male juror with a black male alternate June 22, because the older juror had developed health problems. After five more days of talks, the jury handed down its verdict.

"The reason behind our verdict was the lack of substantial evidence and witnesses' credibility," jurors said in a statement released by the court.

Though he never testified, Scrushy made his case - both in and out of court.

The defendant, who came from relatively modest beginnings as a physical therapist, starred in a 30-minute television program called Viewpoint on weekday mornings.

Scrushy and his wife read Bible verses. Scrushy, who is white, preached at predominantly black churches and donated more than $1-million to the Guiding Light Baptist church, which he joined shortly before he was indicted in 2003. He invited black pastors, some wearing clerical collars, to occupy benches in the courtroom in the jury's line of sight.

Defense lawyer Donald V. Watkins, a Birmingham fixture and owner of a local bank, entreated jurors in his closing to "send a message to Washington" and to remember the days of segregated water fountains and unequal treatment for blacks.

Watkins said Tuesday that prosecutors had blundered by trying Scrushy in Alabama.

"You never fight a man on his home turf," Watkins said. "Corporate leaders generate so much goodwill for actions they do over time that it's hard for an outsider to come in and persuade them otherwise."

The Scrushy acquittal came after juries in New York convicted former executives at Adelphia Communications Corp., WorldCom Inc. and Tyco International Ltd.

But unlike several chief executives who were convicted, Scrushy never took the witness stand.

That left jurors to evaluate only the credibility of former HealthSouth officials who pleaded guilty and testified against him in exchange for more lenient sentences - a fact the defense hammered repeatedly for the jury.

That could give comfort to former Enron executives Kenneth L. Lay and Jeffrey K. Skilling, who await trial in January on fraud and conspiracy charges. Both men have mounted public defenses that point the finger at subordinates who pleaded guilty in exchange for lighter sentences.

Information from the Washington Post, New York Times and the Associated Press was used in this report.

[Last modified June 29, 2005, 01:20:05]