HealthSouth Corp. struck back against its founder, Richard Scrushy, with a countersuit that demands Scrushy return millions in bonuses from a fraud under his leadership and that estimates HealthSouth's fraud-related costs to be $579 million.
The lawsuit requests Scrushy repay improperly awarded bonuses and said a jury should decide how much HealthSouth should be awarded as a result of the expenses it incurred because of the fraud. The lawsuit claims that while the fraud was being conducted, Scrushy realized $34.5 million in annual bonuses from 1996 to 2002 based on the company's profitability; $12 million in bonuses for the company reaching analysts' earnings expectations; and $207 million from selling stock that was trading at an inflated price because of the overstated earnings.
The countersuit also provided a look at the defense the Birmingham, Ala.-based company will use against a breach-of-contract lawsuit Scrushy's lawyers filed Dec. 9, 2005. In the months before that lawsuit was filed, Scrushy's camp said he was wrongfully terminated and HealthSouth's only response was that Scrushy's contract was "null and void" after his March 2003 firing.
The countersuit elaborates, however, noting that Scrushy's employment agreement with the company wasn't valid because it was never ratified by the board of directors and it wasn't filed with the Securities and Exchange Commission. It adds that the employment agreement was signed only by then-Chief Financial Officer William Owens and Larry Striplin, former director and compensation committee chairman.
Owens pleaded guilty to fraud and conspiracy charges and cooperated with the government in its failed criminal case against Scrushy.
The employment agreement in question was dated Sept. 17, 2002, the same date the SEC notified the company that it was conducting an investigation into its securities trading, according to a HealthSouth filing with the SEC.
HealthSouth has restated its earnings from 2000 to 2003 and said they were overstated by $3.9 billion.
Warren Neel, the executive director of the Corporate Governance Center at the University of Tennessee, said it's standard for the compensation committee to make recommendations to the board about employment, but it doesn't have the authority to issue contracts.
Neel added that executives who are awarded bonuses based on fraudulent income often have to disgorge that compensation.
In a news release, Art Leach, a Scrushy attorney, called the countersuit an effort by HealthSouth to avoid its financial responsibility.
Meanwhile, HealthSouth last week held its first annual stockholder meeting since 2002 and shareholders elected the same members to the board that were previously serving. Scrushy resisted pressure to resign from HealthSouth's board for nearly three years, finally doing so Dec. 5, 2005.
Scrushy is scheduled to be tried in April 2007 on civil charges filed by the SEC and last week pleaded not guilty in a separate case to allegedly bribing an Alabama governor to retain influence with the state certificate-of-need board.