As absurd and disheartening as the verdict in the Richard Scrushy trial was, it shouldn't have a deleterious effect on business ethics, future financial fraud prosecutions or the Sarbanes-Oxley Act. Yes, it's possible Scrushy will walk away scot-free from a $2.64 billion fraud case, but it's important to remember that the verdict comes soon after the guilty pleas of 15 HealthSouth Corp. executives, as well as the high-profile criminal convictions of John Rigas of Adelphia Communications Corp., Dennis Kozlowski of Tyco International and Bernard Ebbers of WorldCom.
Nevertheless, there are many lessons in the Scrushy debacle.
For one, moving the trial out of Birmingham, Ala., would have made tremendous sense. Scrushy's $25 million bought him a great defense, but it was predicated on a clueless jury, an obliging judge and strong local ties greased with charitable lucre. His team managed to wipe away damning statements he made on audiotapes, the testimony of a horde of former HealthSouth executives and a vast paper trail of falsified financial statements. Jurors bought the defense line that Scrushy, famous for micromanaging every detail of company business, was the unwitting dupe in a massive fraud led by trusted minions. It's not a stretch to believe that a jury in New York or Washington might not have been as easily misled.
Prosecutors should have moved to have Judge Karon Bowdre removed from the case because of her ties to Scrushy's family. The judge's inexperience with securities cases and lack of judgment were on vivid display throughout the case. At one point she banged her gavel in outrage when a prosecutor mentioned Enron and HealthSouth in the same sentence. She told the jury that any comparison of HealthSouth to Enron was improper because the latter involved a corporate failure, while HealthSouth "is going strong." This is the same HealthSouth that teetered on the edge of bankruptcy for months, laid off 9,000 workers and saw its stock price fall from about $30 per share to about $6. I guess in Bowdre's world, that's going strong, but shareholders may not have been so sanguine: They have filed at least 61 lawsuits against Scrushy over the matter.
Another lesson for prosecutors in every jurisdiction is not to pile on charges just because they have evidence. Scrushy's case originally involved 56 counts ranging from money-laundering to Sarbanes-Oxley violations. At the end of the five-month trial jurors were presented with a 37-page verdict form. Prosecutors must learn to tailor their cases so that jurors get a clear view of the nature and consequences of the criminal acts involved.
Perhaps all is not lost in bringing Scrushy to justice. U.S. Attorney Alice Martin is going to try to resurrect charges that were dropped by Bowdre. Similarly, the Securities and Exchange Commission is trying to disinter its civil case against Scrushy, although it too is facing a Birmingham federal judge who has seemed to bend over backward to accommodate Scrushy's every wish in rulings dating back two years. Judge Inge Johnson ordered the SEC to show cause why its civil case against Scrushy should not be dismissed in light of the not-guilty verdict, despite having no motion from the defense before her--a highly unusual move.
Finally, I agree with Thomas Dolan, president of the American College of Healthcare Executives, that there is no reason to expect that this verdict will lead to a rash of CEOs risking obloquy by ignoring Sarbanes-Oxley and its strictures against signing false financial reports.
Scrushy may have dodged a legal nuclear missile, but it seems likely that there was a strong message delivered in the HealthSouth case and the many others like it: Fraud is not just another tool to help balance the books.