Federal prosecutors continued their crackdown on white-collar crime Tuesday, charging HealthSouth Corp. founder Richard Scrushy with orchestrating a massive accounting fraud to bankroll an opulent lifestyle of expensive artwork and flashy cars.
The case marks the first time the government has brought charges under the Sarbanes-Oxley Act, the landmark securities-reform legislation that Congress passed last year partly to make it easier to convict corporate defendants.
Even against the backdrop of recent cases of executive greed, the Scrushy case stands out because of the amount of money involved and the government's portrayal of brazen self-enrichment at shareholders' expense.
An 85-count indictment accuses the former chief executive of systematically inflating the earnings of the health-care giant by $2.7 billion from 1996 to March 2003 and of giving financial inducements to deter underlings who wanted to confess their alleged wrongdoing to authorities. The government is seeking to seize assets from Scrushy worth almost $279 million, including a Cessna airplane, Rolls-Royce and Lamborghini automobiles and artwork by Picasso, Renoir and Chagall.
"Our message is that no executive is above the law, and through our forfeiture efforts we will work to show that crime doesn't pay," said Alice H. Martin, the U.S. attorney in Birmingham, Ala., where HealthSouth, the nation's largest operator of rehabilitation and outpatient surgery centers, is based.
Scrushy pleaded not guilty during a brief appearance in federal court in Birmingham. U.S. District Judge Karon O. Bowdre set a Jan. 5 trial date and set bail at $10 million. The 51-year-old Scrushy posted bond in the afternoon and was released. He had to surrender his passport and keys to his plane and agree to wear an electronic monitoring device around an ankle so authorities could track his whereabouts.
Scrushy adamantly defended himself against the charges, saying he had been unaware of fraudulent accounting carried out by a band of executives who worked for him.
"I am an innocent man," Scrushy declared in a statement on his personal Web site. "I am deeply disappointed to have my innocence questioned and contested; however, I now embrace the opportunity to clear my name."
The government has charged 16 people since March in the HealthSouth case, 14 of whom have pleaded guilty to wrongdoing and agreed to cooperate in the action against Scrushy.
"This is one of the broadest and most daunting sets of allegations that have arisen to date in the corporate scandals," said Jacob S. Frenkel, a former federal prosecutor who is at Smith, Gambrell & Russell in Washington.
The only high-profile trial completed thus far was that of Silicon Valley financier Frank Quattrone on obstruction charges, which ended in a hung jury last month. The government said Tuesday that it would retry Quattrone.
According to the indictment, Scrushy swore to the accuracy of HealthSouth's accounting in a filing with the Securities and Exchange Commission even though he knew the numbers were fabricated. Such CEO certifications were required by the Sarbanes-Oxley Act so top executives couldn't dodge prosecution by claiming they were unaware of wrongdoing by underlings.
"This is a high-stakes defining moment for the government because if they fail to obtain a conviction under Sarbanes-Oxley, it could chill their willingness to prosecute under that act in the future," said Anthony Pacheco, a white-collar defense attorney at Proskauer Rose in Los Angeles.
The indictment alleges that Scrushy and a cadre of associates undertook an elaborate scheme to prop up HealthSouth's stock by overstating earnings. The company was not earning enough to satisfy Wall Street's expectations, the indictment says, and the executives feared that revealing the company's true condition would cause its stock -- and the stock options they owned -- to plunge in value.
At Scrushy's direction, certain executives would order company accountants to fudge the numbers and would "discuss with them specific methods for falsifying" HealthSouth's books, according to the indictment.
Scrushy took a variety of steps to prevent employees from divulging the fraud, including threats and intimidation, the indictment says. He read the e-mails of employees, placed them under "surveillance" and installed eavesdropping equipment, prosecutors said.
Scrushy faces a theoretical maximum of 650 years in prison if convicted on all charges, which include securities fraud, mail and wire fraud and money laundering. He would face substantially less time under federal sentencing guidelines, but still could spend many years in prison even if convicted on only a few charges.
HealthSouth was founded by Scrushy in 1984 and grew rapidly through acquisitions to operate 1,800 facilities nationwide. The company continues to operate under new management, though its stock has lost 90% of its value since 1998.
Unlike most other corporate defendants who go out of their way to keep low profiles, Scrushy, who was fired in March, has adopted a defiant public persona since investigators began circling his firm early this year. He has jabbed at prosecutors on his Web site and given an interview on "60 Minutes"; he bought the $3.2-million Cessna Citation jet in July, several months after revelations of wrongdoing at HealthSouth surfaced.
On Tuesday, Scrushy's attorneys took the unusual step of announcing that their client would testify at his trial. Taking the witness stand is considered risky because it lets prosecutors introduce evidence they otherwise could not, and because defendants often wither under cross-examination by prosecutors.
Bloomberg News was used in compiling this report.