shocked and dismayed, Former Chief of HealthSouth Acquitted in $2.7 Billion Fraud

["Miklos A. Vasarhelyi" <miklosv@andromeda.rutgers.edu>]

June 29, 2005

Former Chief of HealthSouth Acquitted in $2.7 Billion Fraud

By SIMON ROMERO and KYLE WHITMIRE 

BIRMINGHAM, Ala., June 28 - The federal government's string of victories
in corporate corruption cases ended here Tuesday, when a jury acquitted
the hometown executive Richard M. Scrushy on all 36 counts, despite the
testimony of more than half a dozen former lieutenants who said he had
presided over a $2.7 billion accounting fraud while running the
HealthSouth national hospital chain.

Some outside legal experts said the government might have erred in not
seeking to hold the trial away from Birmingham, where Mr. Scrushy, 52,
was well known for his lavish lifestyle and his generous philanthropy
before he was fired in March 2003, as the scandal drove HealthSouth to
the brink of bankruptcy.
(News
Analysis) 

The Justice Department had been seen as having a particularly strong case
against Mr. Scrushy, HealthSouth's former chief executive, after securing
the cooperation of former company executives who pleaded guilty to their
own roles in the fraud and implicated their former boss.

The jury had even heard secretly recorded conversations between Mr.
Scrushy and a chief financial officer, William T. Owens, in March 2003
discussing balance-sheet problems, with Mr. Scrushy asking, "You're
not wired, are you?" 

Thus armed, the prosecution had seemed to have persuasive evidence,
compared with other corporate fraud cases so far this year that have
resulted in convictions of former top executives at

WorldCom,

Adelphia Communications and

Tyco International. 

But jurors who spoke to reporters said the prosecution's case were
undermined by the credibility of some of those major witnesses and by the
exceedingly complex case itself, which hinged on a charge of conspiracy
and 35 other counts, including securities fraud, mail fraud and money
laundering. 

"There were a lot of holes that weren't filled in for me," said
one juror, who would identify herself only by her jury number, 546.
"I wanted more than just hearsay."

Another juror, identifying himself only as No. 300, said: "As for
evidence, I wanted something in black and white, something like
fingerprints. That wasn't there." 

The jurors said the judge, Karon O. Bowdre, had instructed them to speak
about only their own thoughts on the case and to not describe the
deliberations in the jury room. 

After closing arguments on May 18 the jury worked at an unusually
leisurely pace, meeting only parts of 17 days over the next five weeks.
Even after the jury said on June 3 that it was deadlocked, and the judge
ordered them to try harder to reach a consensus, the jurors met only a
few times a week. 

A turning point came last week when one juror, who has identified himself
as Willis G. Vest, was dismissed because of an illness and replaced by an
alternate. After that, it took only five days of deliberation for the
jury to reach its verdict. 

"I don't understand the verdict; I feel it's wrong," Mr. Vest,
said in an interview Tuesday while lying in bed at his home in Helena, a
suburb of Birmingham. Mr. Vest, a

BellSouth employee who was let go from the jury after suffering from
severe migraine headaches, said he had been one of two holdout jurors who
had argued that Mr. Scrushy was guilty. 

"Almost every witness agreed with each other" about Mr.
Scrushy's involvement in the fraud, Mr. Vest said. He surmised that after
his departure the other holdout had capitulated to the majority's view
that the government failed to make its case. He declined to identify the
other juror by name, gender or race. 

The jury was selected in January in a closed process and no members have
yet been identified by more than juror number. The court does not plan to
release their names until Wednesday. 

Prosecutors claimed that Mr. Scrushy, a former respiratory therapist who
helped found the company in 1984 and built it into a national chain of
rehabilitation and outpatient surgery hospitals, had ordered a fraudulent
scheme to inflate HealthSouth's earnings by $2.7 billion from 1996 to
2002. 

The fraud, prosecutors said, enabled him to amass more than $200 million
as the stock rose on the misleading financial reports. Federal officials
had been seeking the forfeiture of Mr. Scrushy's assets, which include a
$10 million mansion in Palm Beach, Fla.; a 92-foot yacht called Chez
Soiree; a

Rolls-Royce Corniche; and paintings by Picasso, Miró and Chagall.

Mr. Scrushy now faces separate civil suits from investors. HealthSouth's
stock price reached a high of just above $30 in April 1998 only to plunge
to 10 cents a share after the fraud became public in March 2003. Shares
of the company, still trying to recover from the scandal, lost 5 cents
Tuesday, closing at $5.93 in over-the-counter trading.

Over nearly five months of testimony, Mr. Scrushy's defense team
orchestrated a strategy of trying to discredit the government's
witnesses, at one point describing the drinking habits and extramarital
affairs of one witness, Aaron Beam, another former chief financial
officer at HealthSouth who claimed Mr. Scrushy had direct knowledge of
accounting fraud at the company. 

Mr. Scrushy, who is white and formerly attended a predominantly white
church in Vestavia Hills, an affluent suburb, attracted attention by
joining a predominantly black church after his legal troubles came to
light and by preaching at black churches around Birmingham. 

Mr. Scrushy's critics portrayed this move as an attempt to gain favor
among black members of the jury. The jury had six black members and six
white ones when deliberations began last month, but the balance changed
to seven blacks and five whites, after Mr. Vest was released last week.
The jury had seven men and five women. 

The six black and two white jurors who spoke about the case said Mr.
Scrushy's religious activities in Birmingham, where blacks are 70 percent
of the population, did not influence their deliberations. But at least
one juror, a black man who identified himself as No. 152, said he was
impressed by the supporters who appeared each day in court with Mr.
Scrushy; they included pastors and congregants from several black
churches around the city. 

"I only saw the support of certain people who were here," No.
152 said in the courthouse interview, pointing to the public seating area
where Mr. Scrushy's supporters gathered daily. 

In yet another display of the jury's empathy for Mr. Scrushy, several of
the jurors said they would buy stock in a company under his leadership.
"If it's a good company and if it's growing, why not?" said
Juror No. 546, a black woman who had said during pretrial questioning by
lawyers that her hobbies included shopping and sewing. 

But sympathy for Mr. Scrushy was not uniform across Birmingham. He
emerged from the federal courthouse to a mixed chorus of boos and cheers
after listening to the judge in the case read the verdict. 

One person in the crowd repeatedly yelled, "Still guilty in God's
eyes," even as Mr. Scrushy delivered a short speech thanking God,
his family and his supporters. 

Callers to an influential Alabama radio talk show Tuesday afternoon were
"absolutely shocked and dismayed," said its host, Paul
Finebaum, a former friend of Mr. Scrushy and now a critic. 

"I've heard the O. J. verdict mentioned early and often," he
said about three hours into the four-hour program. "I think the
consensus of most people is he played the race card, and he played the
religion card."

And executives at HealthSouth, still trying to recover from the
accounting scandal, echoed the disappointment of those opposed to the
verdict. Although Mr. Scrushy remains one of HealthSouth's biggest
shareholders, the company quickly sought to distance itself from
him.

"The new board and new management team remain appalled by the
multibillion-dollar fraud that took place under Mr. Scrushy's management
and the environment under which such fraud could occur," HealthSouth
said in a statement. "Under no circumstances will Mr. Scrushy be
offered any position within the company by this management team or by
this board of directors." 

Mr. Scrushy, 52, in an interview in the courtroom after hearing the
verdict, said he was looking forward to spending time with his wife and
nine children. He also described Alice Martin, the United States
attorney, and her colleagues who prosecuted the case as "good
people." 

"I forgive them," he said, in between prayers, hugs from his
lawyers and glances at his

BlackBerry messaging device. "You got to forgive people in this
world if they attack you and you want peace."

Ms. Martin said her office would pursue an appeal of several counts
thrown out by the judge, including perjury and obstruction of justice, to
try Mr. Scrushy again on those charges. 

But the acquittal was a defeat not only for Ms. Martin, but also the
first courtroom test of the Sarbanes-Oxley Act, a corporate
accountability law passed in the wake of the

Enron scandal. 

The prosecution of Mr. Scrushy was the first to bring a charge under
Sarbanes-Oxley, accusing him of knowingly certifying a false financial
document. "I don't think it says anything on the strength of the
Sarbanes-Oxley Act," Ms. Martin said. "That was just one of
several federal statutes that was used. It will be tested again."

Miklos A. Vasarhelyi
KPMG Professor of AIS
Director RARC / CARLAB
Rutgers University
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 454 4377 (cell)
http://raw.rutgers.edu/mik los