|Richard Scrushy, former HealthSouth CEO, thanks the jury, his family and God on the acquittal. (June 28)|
NEW YORK (CNN/Money) -
Richard Scrushy, the founder and former CEO of HealthSouth Corp., was found not guilty Tuesday on all charges in the $2.7 billion accounting fraud at the hospital chain.
Scrushy was the first chief executive charged with violating the 2002 Sarbanes-Oxley Act, a corporate reform measure enacted after a wave of corporate scandals that followed the collapse of Enron. Five former chief financial officers testified against him.
A federal jury in Alabama began deliberating about six weeks ago and appeared to be deadlocked. Last week, U.S. District Judge Karon Bowdre replaced one juror due to illness and instructed the reconfigured 12-member panel to start over.
As the verdict was read in the early afternoon Tuesday, defense lawyers were crying while the prosecutors sat stone-faced, according to an eyewitness in the courtroom. Scrushy hugged his wife and his pastor.
Scrushy's acquittal, while a big blow to prosecutors, comes after some recent government wins in its campaign against corporate fraud. Last week, hefty sentences were given to two former Adelphia Communications executives. Two weeks ago, former Tyco CEO Dennis Kozlowski was found guilty. Ex-WorldCom CEO Bernard Ebbers was convicted in March.
Speaking to reporters outside the federal courthouse in Birmingham, Scrushy lashed out at prosecutors for what he called "two years of torture."
The 52-year-old founder and ex-CEO of HealthSouth faced 36 counts, including fraud, money laundering and conspiracy charges. Prosecutors accused Scrushy of masterminding the fraud in order to inflate the company's stock price and to finance his multiple homes, luxury cars and high-priced art.
Scrushy did not take the stand in his own defense, but his lawyers argued at trial that other former HealthSouth executives committed the fraud without Scrushy's knowledge. Other executives faced with similar charges, including former WorldCom CEO Bernard Ebbers, have used the same defense and were convicted.
"I'm surprised," said Stanley Twardy, a former U.S. Attorney for Connecticut who is now in private practice at Day, Berry & Howard. "This is probably the first time that the defense of 'I didn't know' denials has worked for a former chairman or CEO. This may be the first time that the Sergeant Schultz defense has worked."
Jacob Frenkel, a former federal prosecutor, noted the number of ex-HealthSouth CFOs who pointed their fingers at Scrushy.
"If you look at the evidence and the firepower that the government lined up for this case, the outcome is astounding," he said
Frenkel said it's too early to know what impact last week's juror switch had on the deliberations. Given that the jury had earlier told Judge Bowdre that it could not agree on a verdict, the assumption is that the shakeup was significant.
Twardy said drawn-out deliberations typically point to an acquittal. "The jury was out for so long and that is usually a good sign for the defense," he said.
After the verdict, Scrushy emerged from the Hugo L. Black courthouse looking the same as he did before he entered to hear his fate: calm. Scrushy, a well-known figure in Birmingham and host of his own television show, made it clear that he considers himself to be the victim of overzealous prosecutors.
""There are a lot of wrongs that need to be made right," said Scrushy, adding that he planned to discuss his case in more detail at a later date. Scrushy said that, now that he has his acquittal, "I'm going to let my family get theirs."
Minutes later, Alice Martin, the lead prosecutor and the U.S. Attorney for the Northern District of Alabama, told reporters that she was "shocked" and "disappointed" by the verdict, but acknowledged that government lawyers failed to make their case that Scrushy had willfully engaged in criminal conduct.
Prosecutors vow to appeal
Martin declined to speculate about any mistakes she and her team may have made, saying she could not know until the jurors discuss their deliberations.
She said, however, that prosecutors would appeal the counts brought against Scrushy, including a perjury charge, that Judge Bowdre dismissed. If the appeal succeeds, Martin said Scrushy will stand trial on those counts.
In a 2003 indictment, Scrushy was accused of faking HealthSouth's profits from 1996 until 2002. He was also charged under a provision in the Sarbanes-Oxley law that requires CEOs and chief financial officers of public companies to vouch for the accuracy of all quarterly and annual financial reports and to risk criminal prosecution for any deception.
Scrushy's trial was the first test case of that provision. Martin said Tuesday that she did not think that Scrushy's acquittal on that count "says anything" about or would lead to changes to Sarbanes-Oxley.
Nor, added Martin, would the Scrushy setback change prosecutors' efforts to punish corporate fraud.
Of the corporate criminal trials that await, the early 2006 prosecution of former Enron honchos Kenneth Lay and Jeffrey Skilling is the biggest.
Both Frenkel and Twardy, the former federal prosecutors, warned against drawing conclusions from the Scrushy, Kozlowksi and Ebbers' trials and what they could mean for Lay & Co.
"The bottom line is, different jury, different city, different facts," said Frenkel.
HealthSouth to Scrushy: No job for you
HealthSouth (Research), based in Birmingham, Ala., owns a national chain of hospitals and outpatient clinics. The company's stock was delisted from the New York Stock Exchange in 2003 and now trades over the counter for around $6.00, up from about 50 cents two years ago.
HealthSouth stock plunged in 2003 after the company came under federal investigation and restated its financial results.
In a statement issued Tuesday, HealthSouth CEO Jay Grinney said the company looked forward "to putting the past behind us and moving forward." Scrushy's trial, he said, had no direct impact on the company.
Bob May, HealthSouth's chairman, said the company's board and its new management "remain appalled by the multi-billion dollar fraud that took place under Mr. Scrushy's management and the environment under which such fraud could occur."
May added: "Under no circumstances will Mr. Scrushy be offered any position within the company by this management team or by this Board of Directors."
Scrushy still faces numerous civil lawsuits from angry investors.
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