Federal officials last week were planning a second attempt to freeze the assets of HealthSouth Corp.'s founder and former chief executive officer, Richard Scrushy, after a U.S. District Court judge ruled earlier this month that he was entitled to access his personal wealth during the ongoing government investigation.
U.S. Attorney Alice Martin, whose Birmingham, Ala., office is leading the criminal investigation of alleged fraud at HealthSouth, is considering using a legal move known as civil forfeiture, according to documents filed in U.S. District Court in Birmingham last week. The procedure allows the government to take hold of property it believes has a sufficient relationship to illegal activity. At deadline, Martin's office had not filed official documents with the court to request the procedure.
Earlier this month, U.S. District Court Judge Inge Johnson criticized federal prosecutors' probe of the embattled rehabilitation chain and halted the Securities and Exchange Commission's civil suit against Scrushy and HealthSouth until potential criminal charges against Scrushy are resolved. The SEC alleges HealthSouth overstated earnings by up to $2.5 billion since 1997 and has named Scrushy and HealthSouth in a civil complaint. Criminal fraud charges have been filed against 11 individuals but at deadline had not been filed against Scrushy, who continues to maintain the civil charges are without merit. All of the 11 former HealthSouth executives agreed to plead guilty, including all five of the company's former chief financial officers.
In her 64-page ruling, Johnson said the government "undoubtedly manipulated simultaneous criminal and civil proceedings" to its advantage, and "to date, the SEC has failed to establish, as opposed to allege, that defendant Scrushy was involved in the fraud."
In an interview with Modern Healthcare, Martin denied the SEC had manipulated proceedings and said she was pleased with Johnson's ruling because it would allow her office to continue building the criminal case against Scrushy.
The SEC obtained evidence of alleged fraud by Scrushy from the U.S. Justice Department and the FBI for use in its own civil suit, Johnson said, adding the SEC has no evidence against Scrushy "other than what stems from the parallel criminal investigation."
Several former HealthSouth executives directly implicated Scrushy in court testimony during the course of an 11-day hearing in Birmingham to determine the fate of his assets, valued at some $150 million, according to the SEC. Johnson said allowing guilty pleas to criminal charges from the former executives as evidence of Scrushy's involvement in the alleged securities fraud without permitting Scrushy's lawyers to cross-examine the witnesses-who repeatedly invoked their right against self-incrimination in the civil hearing-could harm Scrushy.
Because of the ongoing criminal investigation, Scrushy had been placed in the "precarious position" of either waving his Fifth Amendment right and defending himself before the court or "asserting the privilege and probably losing this civil proceeding," Johnson wrote.
"What is going on here is that the Department of Justice in the middle of a criminal proceeding is using the SEC, a civil body, to get this man cornered so he cannot defend himself," Scrushy's defense counsel argued in written testimony.
Scrushy's lawyers, in a 44-page document filed May 14, sought clarification from the court on the government's right to re-petition the court for an asset freeze through Martin's office.
"The government had a full and fair opportunity during those eleven days to present all of the evidence it desired to support a freeze," his defense team wrote. SEC attorney Bill Hicks, the lead prosecutor in the case, told Modern Healthcare the SEC hasn't made a decision to appeal Johnson's decision. "We're disappointed in the ruling and are reviewing it and considering the next steps," he said.
Meanwhile, HealthSouth last week announced it would cut 80 nonclinical corporate positions as part of its plan to keep the company afloat as it tries to weather the ongoing investigation. The cut follows an initial reduction in early April of 250 employees, including 165 positions at the corporate office and corporate-based positions.
This week is the deadline for New York-based UBS Warburg, HealthSouth's primary banker, to answer a list of 25 questions posed by a congressional committee that launched an investigation into HealthSouth earlier this month. In a letter to UBS Chairman and CEO John Costas, House Energy and Commerce Committee Chairman Billy Tauzin (R-La.), questioned the extent to which UBS Warburg was "diligent in their review and assessment of HealthSouth's financial health and the interwoven financial relationships of many officers and directors at HealthSouth."