Healthcare industry executives said they were stunned by today's acquittal in the criminal trial of Richard Scrushy, founder and former chief executive officer of Birmingham, Ala.-based HealthSouth Corp.
All five of the company's chief financial officers and about 10 other executives under Scrushy-who faced 36 counts-testified that he directed subordinates to overstate HealthSouth's revenue to meet Wall Street expectations. Still, that wasn't enough to convince a jury in U.S. District Court, Birmingham, that Scrushy, 52, knew the company's income was inflated by some $2.6 billion. Jurors deliberated 21 days before announcing the verdict.
"I felt that based on what I read -- and I didn't have what the jury had -- that it seemed like the government had a strong case," said Richard Clarke, president and chief executive officer of the Healthcare Financial Management Association.
Charlie Russell, a spokesman for Scrushy, said his next step will be to seek restitution from HealthSouth. Scrushy already has filed two lawsuits against the company: One seeks legal fees from the company and the other was filed because the company has barred Scrushy, who remains a board member, from board meetings.
Scrushy in the past has said he would like to work with HealthSouth again. But the company sent out a news release minutes after the verdict that quoted HealthSouth Chairman Bob May as saying, "Under no circumstances will Mr. Scrushy be offered any position within the company by this management team or by this board of directors." The release added that Scrushy's contract was voided in March 2003 when he was terminated.
HealthSouth directors will likely face more questions about Scrushy's future with the company on Wednesday when they hold an investor meeting. HealthSouth filed documents with the Securities and Exchange Commission Monday that restated past earnings, lowering revenue numbers by $827 million in 2001 and $697 million in 2000.
The earnings restatement makes the verdict even more difficult to understand, said Robert Broadway, vice president of corporate strategy for Boynton Beach, Fla.-based Bethesda Healthcare System. "There might be a little injustice," he said. Others also expressed surprise.
There were five CFOs who pleaded guilty, but "somehow the CEO didn't know about it . . . That doesn't add up," said David Gilbert, vice president of business development for Creditek, a Parsippany, N.J., outsourcing company.
What seemed to be an overwhelming amount of testimony against Scrushy was a motivating factor in the government's decision to make the former healthcare executive the first test case of the federal Sarbanes-Oxley Act of 2002, said Steven Smith, a partner with the law firm Bryan Cave. He said he believes this case likely will lead to some internal debate within the Justice Department on what threshold is adequate for determining whether enough evidence exists to convict an executive on Sarbanes-Oxley charges.
William Maruca, a partner with the law firm Fox Rothschild said the acquittal is "a tremendous defeat for Sarbanes-Oxley. With a case and facts like this, I wonder if it suggests that the law itself is deficient."
But Los Angeles healthcare fraud lawyer Charles Oppenheim of Foley & Lardner said he doesn't think the Scrushy verdict spells doom for the Sarbanes-Oxley law.
"The verdict doesn't surprise me," Oppenheim said. "It shows the high burden the government has to meet to convict someone. But the government doesn't have to win at trial to get a lot of mileage out of a statute. Most providers are deterred by the law and others will settle to avoid going through this process. Some (like Scrushy) will challenge it all the way."
Lawyers said the government will be criticized for not seeking to move the case outside of Birmingham, where Scrushy is a well-known businessman and philanthropist; he also had connections to the presiding judge, Karon Bowdre.
Scrushy played the "local card" brilliantly and hired good attorneys who knew their environment said Patrick Coffey, a healthcare lawyer with the Chicago office of Gardner, Carton & Douglas. Scrushy also used Alabama lawyer Jim Parkman as his lead attorney. Coffey added that the case marks a "huge failure for government enforcement efforts in healthcare." -- by Joseph Mantone