HealthSouth founder Scrushy settles SEC suit

The action against former CEO and Chair Richard Scrushy was related to the company's $2.6 billion accounting scandal.

By Pamela Lewis Dolan — Posted May 21, 2007

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HealthSouth founder Richard Scrushy reached a settlement with the Securities and Exchange Commission in a civil case stemming from accounting fraud at his company, for which he had been found innocent of criminal charges. But his legal troubles aren't over yet.

The SEC originally wanted $785 million from Scrushy for what the regulator said was his role directing a $2.6 billion earnings overstatement between 1996 and 2002. The SEC and Scrushy settled on $81 million, though he received a $71.5 million credit for repayments he had made to settle other civil suits, said Scrushy's attorney, David Russell.

The remaining $9.5 million in cash payments includes $6 million in bonuses based on the overstated earnings, and $3.5 million in civil penalties, Russell said.

Scrushy did not admit or deny guilt as part of his settlement. But the settlement permanently bars him from serving as a director or officer of any public company.

The SEC's initial seeking of $785 million represented the total amount Scrushy earned during the time period of the overstatement. But according to the SEC's analysis, the $77.5 million, non-civil-penalty portion represented the amount Scrushy earned and shouldn't have, according to Jack Worland, supervisory trial attorney for the SEC. He was the lead attorney on this case. "We're happy with the result. I think it accomplished the commission's objectives," he said.

The U.S. District Court for the Northern District of Alabama approved the settlement in late April.

Birmingham, Ala.-based HealthSouth itself, without admitting wrongdoing, paid $100 million in fines to the SEC in 2005 to settle its investigation into the outpatient rehabilitation company, which was founded in 1984 by Scrushy and grew to have locations in all 50 states before its downfall. The company also has paid $445 million in cash, stock and warrants to settle shareholder lawsuits, as well as $325 million in fines in late 2004 to settle charges of overbilling Medicare and other federal programs.

At least 16 HealthSouth executives either pleaded guilty to or were convicted of criminal charges relating to the accounting scandal. But Scrushy, fired in March 2003 after the scandal came to light, in 2005 was found innocent of 36 criminal counts filed against him. Scrushy has consistently maintained he had no knowledge of any plans to inflate earnings.

Scrushy did not comment on the SEC settlement. Instead, he posted a statement from his senior attorney, Art Leach, on his Web site (link).

"It is the SEC's standard practice that when a settlement is reached to require the parties involved to agree not to comment on the case being settled, and Richard Scrushy intends to honor that agreement. He is pleased to have resolved matters with the SEC. However, Richard Scrushy is still vigorously defending and denies similar claims brought in a class action by HealthSouth shareholders and bondholders and in a stockholder's derivative action. Now that there will not be a costly and distracting trial with the SEC, Richard Scrushy will focus his attention on clearing up other legal issues."

Those other legal issues include pending HealthSouth shareholder lawsuits against Scrushy. They also include a scheduled June 26 sentencing on a criminal conviction in a separate case.

Last year, an Alabama court convicted Scrushy and former Gov. Don Siegelman on bribery, mail fraud and conspiracy charges, with Siegelman also convicted of obstruction of justice. That trial involved accusations that Siegelman appointed Scrushy to a hospital regulatory board in exchange for Scrushy arranging $500,000 in contributions for Siegelman's campaign for a state lottery.

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