HealthSouth CEO Scrushy Ordered to Pay Shareholders $2.9 Billion

June 22, 2009

An Alabama state judge has ordered former HealthSouth CEO Richard Scrushy to pay nearly $2.9 billion to shareholders who sued over a massive accounting fraud that nearly sent the rehabilitation chain into bankruptcy.

Circuit Judge Allwin E. Horn, who heard the case in Birmingham without a jury, ruled in favor of HealthSouth shareholders who filed a lawsuit claiming Scrushy was involved in years of overstating the company’s earnings and assets to make it appear the company was meeting Wall Street forecasts.

Horn wrote in his ruling that Scrushy “knew of and participated in” the faked reports filed with regulators from 1996 to 2002. He said the HealthSouth founder also “consciously and willfully” violated his financial responsibilities as CEO.

Scrushy was acquitted in a federal criminal case over related charges and testified in the state civil case that he knew nothing about any fraud. He is serving a nearly seven-year sentence for a 2006 conviction in a separate state government bribery case.

The Alabama suit accused Scrushy of unethical dealings with the company while it was going broke and complicity in $2.6 billion in fraudulent reports it filed with regulators. The amount shareholders sought included money they claimed he pocketed through sweetheart deals.

While Scrushy is a multimillionaire, it was not immediately clear how he could pay the judgment.

Scrushy attorney Jack McNamee of Birmingham wouldn’t speculate on how much money Scrushy has, but Horn’s final judgment totaling $2.88 billion “is totally out of line — more than anything he could ever have.”

McNamee said Scrushy plans to appeal to the Alabama Supreme Court.

An attorney for shareholders, John W. Haley, said Scrushy was “a man of substantial means” who earned more than $226 million from the time the fraud began until he left the company in 2005. The fraud cost the company $1.8 billion.

Haley said the verdict gave HealthSouth officials and investors something they had been looking for over the years — for a judge to declare Scrushy responsible for the fraud.

“As long as Richard Scrushy was out there saying he was innocent, he still had people listening to him,” Haley said.

The president and CEO of HealthSouth, Jay Grinney, called the verdict “vindication” for the 22,000 employees of HealthSouth, which formed a new management team after the fraud was revealed.

“There was never any question in anybody’s mind inside the company that Richard Scrushy was absolutely in the middle of and the mastermind of the fraud,” Grinney said.

Concerning Scrushy’s assets, Grinney said, “We don’t know what he’s got, but what he’s got is going to be ours.”

Scrushy, who testified publicly for the first time concerning fraud allegations during the trial last month, denied getting millions from the company in improper deals or having any role in cooking the books.

“I had no knowledge of any financial fraud at HealthSouth,” he testified.

While Scrushy was acquitted of criminal charges in federal court in 2005, 15 former HealthSouth executives pleaded guilty and a 16th was convicted. Some testified in the civil case, claiming Scrushy knew that financial reports were faked.

During the lawsuit trial, Haley repeatedly confronted Scrushy over what Haley described as obvious conflicts of interest. Among them was HealthSouth’s purchase of 19 acres of land next to Scrushy’s suburban Birmingham estate for $1.9 million, then giving him the land three years later. Scrushy said he got the land instead of a bonus one year.

In the ruling, Horn also voided all employment agreements that Scrushy had with HealthSouth, including a retirement pact. Scrushy had claimed HealthSouth violated the employment agreement when he was fired as CEO.

Horn discounted Scrushy’s claims that he knew nothing of the fraud.

“The court finds it inherently incredible that a CEO could fail to know of or discover a fraud of this magnitude over almost seven years,” Horn wrote in his opinion.

Five former HealthSouth finance chiefs gave testimony implicating Scrushy in a scheme to fraudulently inflate earnings. Scrushy, who hired all five when he ran the company, blamed them and described them as having personal weaknesses.

Scrushy, who is appealing his bribery conviction, was accused of arranging $500,000 in contributions in 1999 to then-Gov. Don Siegelman’s campaign for a state lottery in return for an appointment to a hospital regulatory board. Scrushy and Siegelman, who also is appealing his conviction, contend no crime was committed.

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