Ex-CEO of HealthSouth indicted on fraud charges

Jay Reeves

Tuesday, Nov. 4, 2003 | 11:16 a.m.

BIRMINGHAM, Ala. -- Former HealthSouth Corp. head Richard Scrushy was indicted on 85 counts alleging he was the mastermind of an enormous corporate fraud scheme that allowed him to personally pocket more than a quarter-billion dollars, federal prosecutors said today.

The indictment, dated Oct. 29 and released today at the federal courthouse, accuses Scrushy of a range of criminal violations, including false certification of corporate statements -- a charge the FBI says makes Scrushy the nation's first CEO accused under a new federal law.

The charges carry a maximum penalty of 650 years in prison and $36 million in fines.

At a news conference in Washington to announce the charges, Assistant Attorney General Christopher Wray said from 1996 through March 2003 HealthSouth consistently failed to meet its own predictions and the expectations of Wall Street's security analysts.

"Instead of telling the public the truth, Scrushy and his accomplices lied," Wray said.

The indictment alleges Scrushy and his accomplices reported $2.7 billion in fictious income. Because Scrushy's compensation was tied in part to HealthSouth's performance, the scheme alowed him to pocket $267 million in salary, bonuses and stock options, Wray said.

To hide the fraud, Scrushy ordered HealthSouth's employees to falsify financial documents, Wray said. He enforced discipline among the members of the conspiracy "through threats, intimidation and payoffs," Wray said, and also eavesdropped on employees' telephone calls and e-mail.

The indictment seeks forfeiture of more than $278 million in Scrushy's allegedly ill-gotten gains, including a 92-foot yacht; luxury cars such as a Rolls Royce Corniche and a Lamborghini; a nearly 22-carat diamond and platinum ring; property in Alabama and Florida; aircraft and other boats; and paintings by Picasso, Chagall, Renoir and Miro.

Wray said the government has obtained a federal court order limiting Scrushy's ability to dispose of any of these assets until the case is finished.

Scrushy, 51, surrendered to federal marshals in Birmingham and made his first court appearance today. The HealthSouth co-founder and former chief executive pleaded innocent.

"I'm disappointed that the government has chosen to go up this path," said Scrushy attorney Tom Sjoblom. "At least now we can get our day in court."

He did not rule out a possible plea agreement. "We are leaving all doors open," he said.

Fourteen former HealthSouth employees, including all five chief financial officers, have already pleaded guilty to criminal fraud charges since the Justice Department began its probe of book-rigging at HealthSouth in March. A 15th has agreed to enter a guilty plea.

The government contends that Scrushy and HealthSouth inflated company earnings by $2.7 billion to make it appear the company was meeting expectations of Wall Street analysts. Scrushy, a former respiratory therapist who helped build the firm into an industry leader, has blamed the fraud on others in the company.

The accounting fraud case against HealthSouth has been viewed as an important test for the law known as the Sarbanes-Oxley Act, which passed last year in the wake of a series of corporate scandals. It requires chief executive and chief financial officers to certify their company's financial statements and holds them criminally liable for inaccuracies.

The indictment released today accuses Scrushy of such a false certification.

A federal court official in Birmingham, speaking on condition of anonymity, said the grand jury that indicted Scrushy heard evidence last week from witnesses, including some of the former HealthSouth executives who have pleaded guilty.

HealthSouth, founded by Scrushy in 1984, is the largest U.S. provider of outpatient surgery, diagnostic imaging and rehabilitation services. The company has some 50,000 employees and about 1,700 sites in all 50 states and overseas.

At a recent congressional hearing, several current and former HealthSouth employees said Scrushy knew about efforts to massage company accounts to meet earnings forecasts.