Richard Scrushy was dealt setbacks in his fraud case last week while current officials at HealthSouth Corp., the company Scrushy used to run, announced plans to settle fraud allegations with the government and close or sell 44 facilities by the end of the year.
HealthSouth Chief Executive Officer Jay Grinney said about two months ago the company's management team, which has been recently overhauled, had a meeting with the government and made substantial progress in reaching a settlement stemming from investigations into an alleged accounting fraud scandal that took place from 1996 to 2002. The U.S. Justice Department and the CMS are both conducting investigations, and Grinney said he's hopeful they'll reach a definitive agreement this month.
In Scrushy's criminal fraud case, U.S. District Judge Karon Bowdre, in Birmingham, Ala., denied a motion made by Scrushy's legal team to have three charges related to the Sarbanes-Oxley Act thrown out on the grounds it was unconstitutionally vague. The development was the latest ruling in the 58-count, $2.6 billion case, which is expected to go to trial in January.
The opinion stated that the law wasn't too vague and that the statute says that to be found guilty under the law, executives must know that they are signing fraudulent documents. Whether or not Scrushy knew earnings in cost report filings with the government were inflated is a matter for a jury to decide, the opinion said.
A spokeswoman for U.S. Attorney Alice Martin, the case's lead prosecutor, said Martin was pleased with the decision but declined further comment.
Scrushy spokesman Charlie Russell said his legal team didn't expect the judge to throw out the charges stemming from the Sarbanes-Oxley law, which holds chief executive and financial officers accountable for accounting fraud at their companies. He said the attorneys' request was "a procedural motion" that allows them to appeal the judge's decision if Scrushy is found guilty of the Sarbanes-Oxley charges.
Russell said the legal team was "very pleased with certain aspects of the ruling," including a signal that the government must prove that Scrushy "willingly and knowingly" signed fraudulent financial filings in order to be convicted.
William Maruca, chairman of the fraud and abuse division of the American Health Lawyers Association and a partner who works out of the Pittsburgh office of Fox Rothschild law firm, said it would be more likely for an appeals court to rule that a federal law is unconstitutional rather than a district judge. However, he added that he would also expect an appeals court to uphold the law.
Part of the motion to dismiss the charges had been argued by Thomas Sjoblom, one of three lawyers from the Chadbourne & Parke firm who withdrew from Scrushy's criminal case last month. The lawyers said they would work on the civil cases that are on hold until there is a ruling in the criminal case. Abbe Lowell, who twice served as counsel to the U.S. House of Representatives-including serving as chief investigative counsel to the minority during President Clinton's impeachment proceedings-and Scott Balber also withdrew from Scrushy's criminal case.
The lawyers' withdrawals may appear to be a setback for Scrushy, but it might be part of the defense team's legal strategy, said Gerald Griffith, a partner with Honigman Miller Schwartz and Cohn and a health lawyers association board member. He added it's common for criminal defense teams to use a lawyer who is more accustomed to the local legal system. "You want someone in there who might be familiar with the judge," Griffith said. In September, Alabama lawyers Jim Parkman and Martin Adams were named to Scrushy's defense team, and Parkman is likely to be the lead trial attorney, Russell said.
Separately, HealthSouth executives held an investor's meeting last week in New York and said the company earned $148.6 million in the third quarter ended Sept. 30, about 3.4% less than the $154 million the company had expected. For the first nine months of the year, HealthSouth said it earned $483.9 million, about 1.8% less than the $492.7 million the company planned to earn.
Grinney said the previously announced restating of the company's finances would cost the company about $91 million in 2004, $65 million more than was anticipated in its 2004 budget. It also is realizing $13 million in costs related to implementing systems to bring the company into compliance with Sarbanes-Oxley.