Scrushy acquittal doesn't mean the end of his HealthSouth troubles

Before his trial, Richard M. Scrushy said that when he was acquitted -- he always said when -- of charges relating to a $2.7 billion accounting-fraud scandal at HealthSouth Corp., he would like to go back to running the company he founded.

Now that he has been cleared of criminal wrongdoing, Scrushy, fired as CEO in March 2003 but still HealthSouth's largest shareholder, is taking some time to consider his next move.

But despite his June 28 acquittal after five months of a trial and jury deliberations, Scrushy is not in the clear. Scores of shareholders are suing Scrushy over the accounting fraud. The Securities and Exchange Commission, at press time, told an Alabama judge it wished to go forward with its $785 million civil case against Scrushy. Civil cases carry a lower burden of proof than criminal cases.

If the SEC action prevails, Scrushy may be prohibited from ever again serving as an officer or executive of a publicly traded company. Not that HealthSouth wants Scrushy back anyway.

"I can tell you I'm not hiring him for any position, and having consulted with the board, I've been told they are not going to replace me with him," said Jay Grinney, HealthSouth's president and chief executive officer, during a June 29 conference call with investors. "It is not a birthright."

Scrushy, on his personal Web site (link), has criticized Grinney specifically in postings lambasting HealthSouth's business decisions since he was fired. But even if Scrushy prevails in all his legal troubles, there's a question of whether Scrushy could ever regain the stature he once had in health care.

"I can't imagine an established health care company or any investor ever having anything more to do with Mr. Scrushy," said Patrick Coffey, a health care attorney with the Chicago firm of Gardner, Carton & Douglas. "He's been acquitted, but all of what transpired -- and nobody disputed the magnitude of the fraud that occurred -- it all occurred during his tenure as chief executive."

It would not be like Richard Scrushy to listen to his doubters, just as he didn't listen to anybody who doubted a respiratory therapist could create and develop America's largest private health-services company, and certainly not to anybody who doubted he would walk away from his trial a free man.

The trial

The question in the trial wasn't whether there was fraud, but whether Scrushy had a role in it.

HealthSouth recently posted some consolidated and revised financial reports to correct previous filings that were called into question because of the fraud. The revised reports showed that HealthSouth's combined revenue was just over $7 billion in 2000 and 2001, nearly $1.5 billion less than previously reported. For the same period, the company lost $555 million, instead of the $481 million profit formerly posted.

Prosecutors in the U.S. District Court in Birmingham, Ala., used testimony from several of the 18 former HealthSouth executives who also faced criminal charges in the fraud, which prosecutors said artificially boosted earnings between 1996 and 2002. (At least 15, including all five chief financial officers, have pleaded guilty to various fraud-related charges.) They also played secretly recorded conversations with Scrushy that purportedly had him making suspicious statements.

But the defense depicted Scrushy as the unwitting scapegoat of a conspiracy hatched by his subordinates, who schemed to fraudulently drive up HealthSouth's stock price so they could get rich, and then turned against him when the plot was revealed to try to save themselves.

The jury believed Scrushy. He was found not guilty of all 36 charges he faced, which included conspiracy, mail fraud, making false statements, securities and wire fraud, and money laundering. This was the first case tried under the Sarbanes-Oxley Act, holding corporate executives liable for issuing false financial statements.

In a statement read by U.S. District Judge Karon Bowdre, jury members said they believed that the government case lacked substantial evidence and that the prosecution witnesses lacked credibility.

Some observers saw the verdict as a case of home-court advantage. Birmingham is HealthSouth's hometown, and Scrushy is well-known for his support of charitable causes. Larry Soderquist, a professor at Vanderbilt University Law School in Nashville, Tenn., said Scrushy's pre-trial strategy of appealing to religion -- including hosting a Christian-themed television show and speaking often at predominantly African-American churches -- might have helped, too.

After Scrushy left the court following the acquittal, he thanked God and then warned reporters, "You've got to have compassion in this world, folks, because you don't know who's next, who's going to be attacked."

In the wake of his acquittal, Scrushy might try to get something out of HealthSouth to help recoup some of his legal expenses, which have been estimated at roughly $25 million.

"His contention is that he was illegally terminated. He will exercise all of his options to compel HealthSouth to perform their end of the contract," said Charlie Russell, his spokesman, though he declined to say whether that meant Scrushy would sue for attorney fees or other compensation. HealthSouth has maintained that Scrushy's contract was voided when he was fired.

As for physicians, Scrushy's acquittal doesn't carry any immediate ramifications.

"I think it just helps take the cloud off HealthSouth so they can get back as a company to doing business," said Scott Becker, an attorney with McGuire Woods in Chicago, who represents some of HealthSouth's physician partners.

In most cases, HealthSouth facilities are co-owned by the company and physicians. When the fraud was first revealed, some physicians did investigate getting out of their contracts, but the company has said many stuck around as the company turned itself around financially.

But with the current management moving away from acute-care facilities to concentrate on inpatient and outpatient rehabilitation, ambulatory surgery and diagnostic services, some orthopedic surgeons left the company to form their own, independent practices. Scrushy needled Grinney on his Web site for the departures of Larry Lemak, MD, and Jim Andrews, MD, prominent in the field of sports medicine, who earlier moved their Alabama Sports Medicine from a HealthSouth hospital to St. Vincent in Birmingham.

Scrushy remains the largest individual stockholder of HealthSouth with an estimated 3.7 million shares and technically is still on the board of directors, though he has not participated in board decisions since he was fired as CEO in March 2003.

Russell said Scrushy, now running a construction and development business as well as assisting in running his wife's sleepwear company, will spend a few weeks with his family before deciding what to do.