The indictment of Richard Scrushy is one of those landmark events that can be seen either as a wake-up call for an industry or an isolated if spectacular example of alleged corporate chicanery. As reaction shows, there is no middle ground."This is a case study for all the things that can go wrong with ineffective governance, and the result is apparent," said Gordon Clark, president and chief executive officer of the Governance Institute, San Diego, who added that the indictment of the former HealthSouth Corp. chief sounds an alarm about the need to improve not only corporate governance but also accounting controls at all levels of healthcare.
Chip Kahn, president of the Federation of American Hospitals, offered a similar sentiment, saying, "Mr. Scrushy no longer holds a position with any company that's within the industry, and those who are knowledgeable about the industry will understand the implications of that."
Assistant U.S. Attorney General Christopher Wray, in unveiling the 85-count indictment last week, said, "Instead of telling the public the truth, Richard Scrushy and his accomplices lied-they cooked HealthSouth's books and Scrushy personally vouched for false financial statements with the (Securities and Exchange Commission) to cover up their scheme. These charges show that the government has important new tools to hold executives accountable for corporate fraud and we won't hesitate to use them where the evidence warrants it."
One of those new tools is the Sarbanes-Oxley Act of 2002, which holds chief executives personally liable for financial misreporting. If convicted, Scrushy-the first CEO indicted for violating the act-faces a possible maximum sentence of 650 years in prison, the forfeiture of $279 million and more than $36 million in fines.
The indictment alleges Scrushy was the instigator and ringleader of a wide-ranging scheme to inflate the rehabilitation and out-patient-care company's earnings to meet Wall Street's expectations, adding at least $2.7 billion in fictitious income to HealthSouth's books and records during the course of a multiyear conspiracy dating back to at least 1996. Five former chief financial officers and 10 other company officials have agreed to plead guilty to fraud charges in recent months, some of whom have directly implicated Scrushy in masterminding the scandal.
Appearing subdued in leg shackles with his lawyers at the Birmingham federal courthouse last week, 51-year-old Scrushy pleaded not guilty to all charges before federal Judge Michael Putnam, who set a Jan. 5, 2004, trial date and freed him on $10 million bond. At the request of prosecutors, most of Scrushy's assets were impounded and he is now wearing an electronic monitoring bracelet to prevent him from fleeing.
"As I have said from the outset, I am an innocent man," Scrushy proclaimed that same day on his personal Web site, richardmscrushy.com, which was launched late last month. "I now embrace the opportunity to clear my name. The truth will emerge as I am able to confront my accusers and prove my innocence before a jury of my peers and the watchful eyes of our public."
Impact still unknown
How much the HealthSouth scandal will tarnish the U.S. healthcare industry remains to be seen. What is certain is that if the criminal allegations against Scrushy prove to be true, he and his company will take a featured place in the current roster of U.S. corporate malfeasance, alongside Adelphia Communications, Enron, Tyco International and WorldCom.
The similarities in these cases are striking. Corporate executives conspire to deceive their boards, accountants, securities analysts, shareholders and the public. In each case, their actions either destroyed or left in disarray once high-flying companies (See sidebar, p. 7).
"The HealthSouth situation is an extraordinary set of circumstances, but it has to be viewed in context of what's happening with business, with Sarbanes-Oxley and with heightened sensitivity from government regulators toward more oversight of corporations' operations," said Larry Sanders, chairman of the Chicago-based American College of Healthcare Executives. "We now live in an age of dramatically heightened accountability."
Healthcare executives and board members need to pay special attention to the Sarbanes-Oxley-based criminal count, said Stuart Gerson, who was acting attorney general in the early months of the Clinton administration and now heads the national litigation practice of the law firm of Epstein Becker & Green, Washington. "The government argues that it's a lower intent crime than the more traditional crimes. But whether or not the government is right about that, officers who are on boards who sign financial statements and board audit committee members will be held responsible" for their financial statements. "It's indicative of the post-Tyco, Enron universe we work in, and now we can say welcome to healthcare."
Analysts said the scandal likely would not make it harder for healthcare organizations to access capital. "The market is going to distinguish between HealthSouth's issues, which are a function of managment malfeasance, versus issues that are more fundamentally driven," said Kemp Dolliver, an analyst with SG Cowen Securities Corp., New York. He cited Triad Hospitals which recently issued $600 million in debt at a favorable interest rate.
The indictment, with its myriad references to conspiracy; false statements and certifications; mail, wire and securities fraud; and money laundering, "sends the message that there's one rule of law that applies to corporate executives," U.S. Attorney Alice Martin, the lead prosecutor in the case, told Modern Healthcare.
Martin said months of forensic accounting by PricewaterhouseCoopers resulted in an updated figure for the false income, up from the $2.5 billion reported in March. "They've already confirmed $2.74 billion; they anticipate it will be higher," she said.
The falsification method was known as "filling the hole" or "filling the gap," to co-conspirators. To conceal the ongoing fraud, the indictment alleges Scrushy relied on electronic and telephone surveillance and other forms of threats and intimidation to control his accomplices, board of directors and HealthSouth employees.
"There were a number of people here who were personally drinking the organizational Kool-Aid," the Governance Institute's Clark said. "These were people at low levels of the company who were clearly not going to get wealthy off of what happened, and yet they still went along with it."
The money-laundering counts allege Scrushy knowingly engaged in financial transactions using criminally derived property, including the purchase of several residences in Alabama; property in Palm Beach, Fla.; a 92-foot yacht; diamond jewelry; paintings by Picasso, Renoir and others; and several luxury automobiles.
Last week, the House Energy and Commerce Committee's Oversight and Investigations Subcommittee heard testimony from current and former HealthSouth executives and the accountants and analysts who have said the company duped them.
One of the key findings was the lack of board oversight found in other recent corporate scandals. "Even in advance of the (Scrushy) indictment, there were questions raised that HealthSouth did not have an independent board, that the board's committee structure was flawed, and that the committees did not have power or independence," Clark said.
Sage Givens, a member of the HealthSouth board's audit committee, told the panel: "At HealthSouth we had numerous controls and systems in place that should have helped to detect this fraud. Unfortunately, when high-level management conspires to commit a criminal act, I don't know of any corporate governance policy that would prevent such behavior. How to prevent this type of fraud in the future is certainly a challenge for boards all across this country."
The House panel's probe is continuing in tandem with the investigation by federal authorities from Martin's office, the Birmingham office of the FBI, the Internal Revenue Service's local division and the U.S. Postal Inspection Service.
HealthSouth said last week that it has received a notice of default from some of its creditors, but it expects to remain current on all interest payments and upcoming payments due to its bank and noteholders.
"The tragedy is that you have a lot of good people who work for these corporations and they put their soul into it," said Thomas Nihill, co-founder of Nihill & Riedley, a Philadelphia-based forensic accounting firm, and former special agent for the IRS' Criminal Investigation Division. "But when you do bad things, it all comes crashing down and there's devastation in the company and in peoples' lives."-With Tony FongBack to main page
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