With 36 not-guilty verdicts in hand, Richard Scrushy is planning a Napoleon-like return from exile to lead HealthSouth Corp., the company he founded, muddying what is otherwise an improving outlook for the rehabilitation services company.
Scrushy's intention to return--a move that HealthSouth opposes--is a potentially major headache for the company, which is looking to 2006 as the year it may get back on track following its multibillion-dollar fraud scandal.
At the same time, the Scrushy verdict isn't likely to slow the not-for-profit sector of the healthcare industry in its steady march toward adopting parts or all of the requirements of the Sarbanes-Oxley Act of 2002, the corporate reporting law Scrushy was accused of violating in his criminal trial. (For reader reaction, see poll, p 16.)
Despite the impending clash between HealthSouth and Scrushy, the outlook for the company has improved, with investors showing support for the company's leadership.
A major goal for HealthSouth is to finally get its books in order, and it has set a timetable for producing financial statements for 2004 and 2005.
The just-released numbers for 2003 indicate the Birmingham, Ala.-based company still has a tough job ahead, though in a conference call HealthSouth Chief Executive Officer Jay Grinney voiced optimism: "I think this is a great company," with "terrific" assets and a "wonderful" business model.
For Scrushy, his next action is to try to return to HealthSouth as its chief executive. Civil suits filed against him, including a suit by the Securities and Exchange Commission, are not a major concern, according to one of his lawyers, Donald Watkins.
Though Scrushy still sits on the board of directors, he has been effectively shut out of decisionmaking at the company.
Scrushy "has a keen interest in what goes on at HealthSouth," Watkins said, given that Scrushy still owns about 1% of the company, a stake worth about $20 million as of July 5.
More long odds for Scrushy
Scrushy's odds for achieving a restoration at HealthSouth appear to be slim, though that also was the case in his criminal trial. Industry executives were hard-pressed to come up with names of deposed CEOs--in or out of the industry--who were able to get their positions back (See related story, p. 7). And even if Scrushy could manage a return, there's a question of how investors and employees might respond.
"It's very unusual," said governance consultant Edward Kazemek, chairman and CEO of Accord. It's a legal question that is best sorted out by the courts or lawyers, he said. But from Kazemek's perspective, "It seems a stretch (to think) he has much of a basis for inserting himself in that company."
Similarly, Larry Scanlan, a managing director at Navigant Consulting, said that it would be difficult for Scrushy to engineer a return to HealthSouth. Even if he were able to regain control, managing HealthSouth--given what it's been through--would not be easy, he said. "I have a hard time believing he's going to get back in there," Scanlan said. "It's hard to go back even under good circumstances," though it's not unheard of, he said.
James Nathan, president and CEO of 971-bed Lee Memorial Health System, Fort Myers, Fla., left the system on good terms in 1997 and returned to lead it again in 2000, Scanlan noted. But as Nathan said, his position was very different from Scrushy's; Lee's board wanted him to come back to help turn around a system that was struggling with the rest of the industry in dealing with the effects of the Balanced Budget Act of 1997.
But HealthSouth's management and board want to rebuild the company without its founder. Grinney said in the conference call: "I'm sure that some of you have questions about whether or not Mr. Scrushy will be coming back on to the board or coming into some type of management position. I can tell you I'm not hiring him for any position. And having consulted with the board, the board is not going to replace me with him. (The job) is not a birthright."
A spokesman for the company said via e-mail that HealthSouth remains "appalled at the fraud that was committed under (Scrushy's) stewardship," and his employment contract was "declared null and void."
Unusual or not, Scrushy is as determined to get the company back as he was to win the criminal trial, said his lawyer Watkins, who said Scrushy was unfairly removed from the company. Scrushy was unaware of the accounting fraud at HealthSouth and was unable to take action on it once he learned of it because he was removed from his position, he said. People at the company lied to Scrushy, Watkins said, adding: "This was not a case of (being) asleep at the wheel. He has a right to his company back."
Fight Scrushy `at their own peril'
Scrushy is considering different options for trying to return to HealthSouth, Watkins said. The first step will be to lobby institutional investors for support of his leadership. That may not be fruitful. The largest single owner of HealthSouth shares according to Yahoo Finance, Iridian Asset Management, spoke up against Scrushy and in favor of the executives now in charge. "We are entirely supportive of the present management," said David Cohen, a principal at Iridian, which owned $57 million worth of the stock as of March 31. Cohen said Iridian normally doesn't publicly discuss its views but is strongly opposed to Scrushy's return and wants to spread the word. "We have less than zero support for his return," Cohen said.
Balaji Gandhi, research analyst for investment firm Pacific Growth Equities, said he's unaware of any institutional investors who are in favor of Scrushy's return. "I guess he doesn't have any allies" in the financial community, he said.
Watkins said institutional investors can fight Scrushy's return "at their own peril." And if institutional investors in the end do not support Scrushy's return, he'll consider a buyout with outside money or legal action. Grinney said in the conference call that HealthSouth would fight any legal action Scrushy takes.
Scrushy still faces numerous civil lawsuits, including a suit from the SEC. That suit was questioned by the presiding judge, though, who asked the agency to explain why the case should proceed given Scrushy's clean sweep in the criminal trial. The SEC presented its argument late last week with a decision not expected right away.
CMS rules loom bigger
Aside from its battle with Scrushy, HealthSouth faces challenges to its business, particularly from the so-called 75% rule issued by the CMS, which threatens to limit its original core business of inpatient rehabilitation. The rule has limited the types of patients it can serve on an inpatient basis, though the company and others are working to scale back the rule. The 75% rule is a much bigger threat to HealthSouth than the possibility of Scrushy returning, Gandhi said.
Nevertheless, assuming 2005 goes as planned by the company as a transitional period, 2006 could be a decent year for it, Gandhi said. The three other types of services HealthSouth offers are still fairly fragmented, meaning the company could increase its market share through consolidation in those areas, Gandhi said. Pacific Growth rates the company as expected to outperform the market as a whole, he said.
And Scrushy's unexpected acquittal for violating Sarbanes-Oxley doesn't mean the law has lost its teeth with the healthcare industry. Not-for-profit hospitals are taking the tenets of Sarbanes-Oxley seriously and that trend shouldn't be slowed by the Scrushy decision, Navigant's Scanlan said.
Both for-profit and not-for-profit hospitals and systems will continue to rely on Sarbanes-Oxley as a standard for oversight and accountability, despite the failure of the first prosecution under the law, said John Tiscornia, a principal with Wellspring Partners, a healthcare consulting firm.
Moreover, the fact that Scrushy had to go through a trial provides a strong incentive for healthcare senior managers to follow the law, Tiscornia said.
Peter Leibold, executive vice president and CEO of the American Health Lawyers Association, said, "People aren't saying, `Scrushy got off--we don't have to heed the lessons of Sarbanes-Oxley.' I think (the trial has) had the desired effect."
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