An unexpected decision by Richard Scrushy's defense to rest in his criminal trial opened the door to a possible jury verdict as soon as this week.
Closing arguments, scheduled to begin May 16 in U.S. District Court, Birmingham, Ala., likely will result in a contention by the defense that if HealthSouth Corp.'s auditor Ernst & Young didn't know about the fraud, then it's plausible Scrushy didn't know about the fictitious revenue.
The closing arguments are coming after nearly five months of testimony but a little sooner than many expected. After about three weeks of presenting its case, the defense rested May 11 in a move that seemed to surprise most.
"It was a surprise to everyone but us," said Charlie Russell, spokesman for the founder and former chief executive officer of the Birmingham-based rehabilitation giant.
The defense's closing of its case put an end to speculation that Scrushy would take the stand. To Christopher Crosswhite, a partner who works in the healthcare division of the law firm Duane Morris, that means two things: Either the defense thought the government's case was so weak that it didn't need to put Scrushy on the stand, or it thought Scrushy would buckle under cross-examination.
"Most of the time you don't want to put the defendant on the stand if you don't have to," Crosswhite said.
He pointed to Bernie Ebbers, the former WorldCom CEO, who is appealing a verdict that found him guilty on nine counts of fraud. Ebbers' testimony may not have hurt him, but it certainly didn't help him, Crosswhite said.
Scrushy's defense team took less than a month to present its case, while the government spent four months. It's typical for the prosecution to take longer in fraud cases because there's hardly ever a smoking gun to connect an executive to the fraud, Crosswhite said.
The prosecution's examination of witnesses was continuously interrupted by objections from the defense, which could mean that Scrushy's lawyers weren't happy with the testimony. If witnesses were weakening the prosecution's case, the defense would be less likely to object, Crosswhite said.
But last week, the prosecution was dealt another setback as two more charges were dropped. Karon Bowdre, the presiding judge, threw out one of the two remaining charges under the Sarbanes-Oxley Act of 2002 and one obstruction-of-justice count.
Bowdre threw out a Sarbanes-Oxley charge that claimed Scrushy directed then-Chief Financial Officer Bill Owens to sign fraudulent documents. Scrushy, who is the first CEO to be charged under the act, still faces one of those charges, which claims he knowingly signed the faked financial documents, and up to 47 fraud and money-laundering counts.
The defense has maintained that people below Scrushy conducted the fraud -- which the government puts at $2.64 billion in faked income -- and they're expected to reiterate those allegations during closing arguments. Although Scrushy's team of lawyers and the current regime at HealthSouth think Ernst & Young should have detected the fraud, at least one accounting expert doesn't think that's the role of a company's auditor.
Kinney Poynter, executive director of the National Association of State Auditors, Comptrollers and Treasurers, said auditors can't check the authenticity of all of a company's financial statements because it would be too costly for the client. "Even if you did a perfect job there could be fraud and you wouldn't uncover it," he said.
HealthSouth filed a lawsuit in April against the firm saying it should have detected the fraud. The lawsuit blames Scrushy for the faked income and says Ernst & Young ignored signs of the fraud to appease Scrushy. Ernst & Young had earlier filed a lawsuit against HealthSouth, saying the fraud damaged the firm's reputation.
In a separate case involving HealthSouth, the trial of two former executives began on charges that they participated in an alleged bribery scheme that helped the company win a five-year, $250 million contract to manage a rehabilitation hospital in Riyadh, Saudi Arabia.
The trial of Robert Thomson, a former president and chief operating officer of HealthSouth's inpatient division, and James Reilly, a former group vice president of legal services, began earlier this month in U.S. District Court in Birmingham.