Fraud ran for seven years

By JACK HEALY
Published: June 18, 2009

Four years ago, Richard M. Scrushy, the former chief executive of HealthSouth, walked out of a federal courthouse in Alabama and thanked God that he had been acquitted of criminal charges that he defrauded the company. But on Thursday, a state judge still found Mr. Scrushy responsible for the fraud and ordered him to pay $2.9 billion to the company’s shareholders.

In his decision, the judge, Allwin E. Horn, declared that Mr. Scrushy knew about and took part in concocting false financial statements that inflated HealthSouth’s earnings to meet Wall Street’s expectations and to buoy the stock.

The fraud ran for seven years, totaled $2.7 billion and was “remarkable and perhaps unique” in its size and scope, the judge wrote.

“Scrushy was the C.E.O. of the fraud,” Judge Horn wrote.

The ruling was a coda on an era of scandals at companies like Enron, WorldCom, Tyco International and ImClone.

“This is the last chapter in the great epic drama of major corporate scandals that we saw in the last 10 years,” said Robert J. Mintz, a former federal prosecutor who followed Mr. Scrushy’s criminal trial. “It in some ways closes the book on the wave of unprecedented corporate fraud we saw. This one has dragged out even longer than Enron.”

For prosecutors who failed to win a conviction of Mr. Scrushy and shareholders whose HealthSouth shares crumbled after the fraud was unmasked, the judge’s decision offered a belated, if anticlimactic, vindication.

“He was the orchestrator of this fraud,” said Alice H. Martin, the United States attorney who unsuccessfully prosecuted Mr. Scrushy on 36 criminal counts. Ms. Martin is retiring on Friday. “That’s what I’m calling my retirement gift.”

While Mr. Scrushy’s criminal trial in 2005 was a five-month drama that fascinated many in Alabama and drew throngs of reporters to the courtroom, this civil trial was a quieter proceeding. It lasted two weeks and was decided by a judge, and Mr. Scrushy was often not even present.

Mr. Scrushy had already been sentenced to nearly seven years in prison for bribing a former governor of Alabama, and he spent much of the civil trial in a holding cell away from the courtroom, lawyers said. He appeared in court only to testify in his own defense.

Lawyers said the judgment was the first time that Mr. Scrushy had been found liable in any courtroom for his actions at HealthSouth, which operates dozens of rehabilitation clinics and hospitals across the country. He has already been ordered to pay fines and to repay millions of dollars in bonuses. Several other executives of HealthSouth have been convicted in the case.

Mr. Scrushy has maintained his innocence and has said he knew nothing about the fraud. His lawyers did not return calls for comment on Thursday, but other lawyers connected to the case said they expected Mr. Scrushy to appeal. He is appealing his criminal conviction in the bribery case.

Lawyers for HealthSouth and shareholders said they were poised to go after Mr. Scrushy’s assets, but it is doubtful they will ever squeeze anything close to $2.9 billion from him. Mr. Scrushy has sold his shares of HealthSouth — which closed at $13.02 on Thursday — and was estimated to have $275 million in assets in 2005, said John Haley, a lawyer for shareholders.

“The only thing that remains now is collecting on it,” said Donald Q. Cochran, a law professor at Samford University in Birmingham, Ala.