The Insatiable King Richard He started as a nobody. He became a hotshot CEO. He tried to be a country star. Then it all came crashing down. The bizarre rise and fall of HealthSouth's Richard Scrushy.
By John Helyar RESEARCH ASSOCIATES Brenda Cherry and Patricia Neering

(FORTUNE Magazine) – Shortly after dawn on July 30, 2002, William A. Massey Jr. backed his GMC Yukon out of his driveway in a suburb of Birmingham and turned the wrong way down Weatherly Club Drive. Instead of heading for his office in town, he drove to the back of the subdivision, where the paved road turns to dirt. There he got out of the SUV, sat down, put a shotgun in his mouth, and blew his brains out.

The act was horrifying. The man's identity made it shocking. Massey's boss was Richard Scrushy, chairman and CEO of HealthSouth. Scrushy headed Alabama's third-largest public company, but he also had many private investments. They ranged from medical companies that did most of their business with HealthSouth to a pajama company called Uppseedaisees, which kept his wife, Leslie, occupied. Bill Massey was Scrushy's personal CFO for those private interests, doing the financing, paying the bills, moving around money--and, allegedly, stealing a lot of it.

Massey's life came totally unraveled in just one week, after he was found to be both an embezzler and an adulterer. The 37-year-old CPA had a wife and two kids and looked like an accountant from central casting. Yet he'd somehow taken up with a beautiful brunette named Hope Launius, who worked for Uppseedaisees and was Leslie Scrushy's close friend. Some of the $500,000 Massey siphoned from Scrushy's accounts was spent on lavish dinners and gifts for her, according to people familiar with the matter. Scrushy learned of both transgressions, financial and marital, the week of July 22.

"He was very hurt and felt betrayed," recalled Brian Ray, another Scrushy employee, in court testimony. Scrushy grilled both Massey and Launius with a fury HealthSouth employees knew well, for he was at once a supersalesman and a supercilious bully. He believed Launius was in on the theft, though she vehemently denied it. At one juncture, according to Ray, she pointed at Massey and declared, "He was the one stealing, not me."

The day after Massey's suicide, Scrushy sold $25 million of his shares in HealthSouth. Taken together with the $74 million of stock he'd sold in May, that meant he'd shed one-third of his holdings in his own company that year. Also on July 31, he reported Massey's alleged theft to local police and again confronted Launius. She won't say what happened then or comment on any other aspect of the matter. She's saving her recollections for a book she's writing. But the consensus account of friends and law-enforcement officials with whom she has discussed the matter is that Scrushy demanded to know what she knew about his financial affairs. Launius, those sources say, told him that Massey had been very nervous about the $74 million sale of HealthSouth stock in May, when Scrushy was making rosy forecasts about the company's outlook. It made her think, she told him, that he'd been inflating the stock price, the sources say.

Launius thought that they had an understanding, according to these sources: Scrushy wouldn't bust her, she wouldn't bust him. But he is said to have kept contacting Launius's estranged husband about her transgressions. They began divorce proceedings, and she returned to her old job at a Parisian department store's cosmetics counter. It seemed a world away from the magical one that had blown up on her. (Through an aide, Scrushy denies making a deal with Launius or telling her husband what happened.)

Then HealthSouth blew up too. On Aug. 27 it announced that it would suffer a $175 million profit shortfall because of changed Medicare regulations. Its stock plunged 58% in two days, to $5. The papers said federal investigators were looking into Scrushy's stock sales ahead of the bad news. But the person who'd actually handled the sale of three-quarters of those shares couldn't talk to them, because he was dead. And so, according to law-enforcement sources, Launius picked up the phone and called the FBI and the SEC.

The world Richard Scrushy once ruled has collapsed with stunning swiftness. Only six months elapsed from the start of the SEC's investigation to the filing of its $1.4 billion fraud suit against him in March (the fraud is now estimated at more like $2.5 billion). It took just seven weeks, from March 19 to May 5, for the Justice Department to accumulate 11 guilty pleas from Scrushy aides. All five CFOs in the company's history have admitted to cooking the books. All were once courtiers to the man they called King Richard, for understandable reasons. In a state of tired old mills, he created an exciting growth company. In the bureaucratic universe of health-care management, he fashioned a starry kingdom. Then, over time, it all went quite mad. Vision gave way to delusion, success to excess--and once loyal followers became informers. Hope Launius put in her calls, CFO Bill Owens put on a wire, and at the U.S. Attorney's office, tipsters had to take a number and get in line. At HealthSouth, the man once called King Richard is now known as Kool-Aid Richard.

The ex-CEO is today a combative defendant. He and his lawyers are responding to all subpoenas and motions with guns blazing. They argue that HealthSouth's bean counters bamboozled both shareholders and Scrushy himself. On Yahoo message boards and in a brief phone call to FORTUNE, Scrushy insists he's a victim. "I've been so mistreated, so lied to, it's just massive," he says, vowing that once his name is cleared, his attorneys will seek damages from those who spread lies. (Scrushy declined to be interviewed for this story, though he responded to some questions through an aide.)

Of all the accounting scandals that have erupted across the business landscape, this one may well be the strangest. That's because it has as much to do with narcissism as it does with greed. We tend to go directly to avarice in analyzing the Dennis Kozlowskis, Bernie Ebbers, and John Rigases of the world. We deplore their obscene paydays, and we measure their sins in symbols of excess, like $15,000 umbrella stands. But nearly every rogue in the gallery is also a case of what the textbooks call "narcissistic personality disorder," defined as a "pattern of grandiosity, a need for admiration, and lack of empathy."

Scrushy certainly enjoyed the trappings of corporate gentry--the four mansions, the ten boats, the $135,000 bulletproof BMW, the $7.5 million Sikorsky helicopter, the G-5 jet he sometimes piloted himself. But for him, it wasn't enough to come along at a time when successful CEOs were treated like rock stars. He wanted to be a rock star. Did Dennis Kozlowski ever produce a CD, go on tour, and sing lead vocals for a professional band? Did Bernie Ebbers work the crowd at the Grammys? Did John Rigas host a radio show and do ads for a bar called the Live Bait? Scrushy did all that and lots more. In fact, in his later days as CEO, he wasn't in the office much--he was managing a girl group he'd dreamed up called 3rd Faze, which had once opened for Britney Spears.

Scrushy behaved this way partly out of a voracious need for self-affirmation and partly because he could. HealthSouth had no well-pedigreed MBAs who might challenge him--Scrushy liked to hire and advance up-from-nowhere Alabamians like himself. The company got no reality checks from big competitors; in the fragmented business of health-care clinics, it was the sole superpower. More than any other of the current crop of rogue executives, Scrushy was the unquestioned king of his realm.

The Scrushy story is not just a fable for our time but a mystery to people who knew him growing up in Selma, Ala., a sleepy river town of some 24,000 people, made briefly infamous in the 1960s as one of the pivotal battlegrounds of the civil rights movement. Richard Scrushy was never called a comer there; he wasn't even called Richard Scrushy. He went by his middle name, Marin, and he was the unremarkable middle child of Gerald Scrushy, a cash register salesman, and Grace, a nurse at the local hospital. The Parrish High yearbooks of the late 1960s bear photos of Marin Scrushy but no evidence that he was in any school activities.

Scrushy hung with some Parrish High kids who fancied themselves countercultural, but he wasn't the crowd's leader. That was Fielding Pierce, the way-cool lead singer of Selma's top teen band, the Born Losers. Scrushy played in rock groups too, but his garage bands were as undistinguished as every other facet of his youth.

So how on earth did he go from Marin Scrushy, Selma nobody, to Richard Scrushy, health-care tycoon? Not very fast, to begin with. He dropped out of high school when he got his girlfriend pregnant and they married. He became a bricklayer to support his accidental family (another baby soon followed) and possessed all the attributes of a trailer-park lifer, except for some that just didn't fit. "You went over to Marin's trailer," his friend Gary West recalls, "and he didn't serve Pabst, he served wine and cheese."

One other quality: He was very smart. It was a source of frustration to his mother, who told him he had great potential and prodded him to use it.

One day, according to a story Scrushy has told friends, he was struggling to haul a load of cement up a ladder as a worker at the top berated him and told him to hurry up. He heaved the load before his tormentor, who snarled, "Now go get another one." He did not. He walked off the job and all the way to his parents' house and told his mother he wanted to get his GED and go to college.

She said there was growing demand for respiratory therapists at the hospital, and he agreed to try that field. Scrushy enrolled at Jefferson State Community College in Birmingham, where, as he later related in a commencement speech, he cut quite a figure: "a working dad with holes in my blue jeans, a ponytail, and not enough money for a soft drink." After a year of academics at Jefferson State and a year of clinical training at the University of Alabama at Birmingham (UAB), he graduated in 1974 and turned to teaching respiratory therapy at UAB.

It was only Birmingham, but compared with his hometown, it might as well have been New York City. Starting to sense his possibilities, Scrushy divorced his wife and started going by "Richard." The ponytail came off the back of his head, and inside it, says friend Gary West, "it was like a light bulb went off."

This sphere of health care was the land of opportunity in the late 1970s. Respiratory therapy departments were once in forgotten corners of hospitals. But after Medicare began in 1965 and paid generously for those services, they became big growth areas. Few people were trained in the field, and Scrushy took advantage of the demand. He jumped from teaching at UAB to running a Birmingham hospital's respiratory therapy unit to starting a new department to teach again at Wallace Community College in Dothan, Ala. His circumstances were still modest, though: At age 26, he was teaching at a two-year vocational school and living in a government-subsidized house with the second Mrs. Scrushy, a local girl named Karen Brooks.

His big break came in 1979, when he was hired by a Houston-based company called Lifemark. It was one of many for-profit hospital chains founded after Medicare money began gushing into the health-care system. There were tremendous opportunities for a certain kind of entrepreneur. "These people were all mercenaries," says one person who knows both the industry and Scrushy. "He fit right in, and he had to have been saying to himself, 'Holy cow, I can do this!'" Scrushy made his mark building up a respiratory therapy unit at a hospital where Lifemark had contracted to run the unit.

After Lifemark was acquired in 1983, Scrushy led four colleagues out the door to start a chain of outpatient clinics based in Birmingham. The co-founders pooled only a little money-- $50,000--but Scrushy had big plans. Stopping by the house of an old Selma friend, Jimmy Mitchell, one day, he vowed, "I'm either going to make it big or go flat broke." Mitchell could sort of tell by the gold Mercedes Scrushy was driving.

When renowned sports surgeon James Andrews moved his practice to Birmingham in 1986, he planned to affiliate his clinic with a big national health-care company. But when he was told about this local startup company, he met Scrushy and he was sold. "He had boundless energy, and he was a great motivator," recalls Andrews, whose clinic moved onto the first floor of the one hospital HealthSouth operated. "He was working so hard himself, it was almost like you couldn't let him down."

Scrushy was irked by employees who couldn't match his drive, and he stopped one listless HealthSouth meeting to draw a picture of a wagon and ten stick figures. Eight were alongside or in it; two were pulling. "Everyone has to pull the wagon," he said. The drawing was reproduced many times, and the company credo became "Pulling the wagon together."

By 1986, when HealthSouth had grown to $20 million in annual revenues and gone public, Scrushy's transformation into royalty was underway. It was good to be the king--you could set the past right. Scrushy formed a rock group called Proxy and recruited three of the old Born Losers to play in it; two of them also joined HealthSouth. Fielding Pierce, who had gone from ultra-cool high-schooler to manager of a Wendy's, must have been a particularly satisfying hire.

Proxy was a musical outlet for Scrushy, yes, but it was also another kind of power. Bill Owens, then HealthSouth's controller, had to get the numbers right by day and, as Proxy's drummer, the beat at night. Otherwise he'd hear about it from Scrushy, who could be as cutting onstage as he was in meetings. Scrushy would let vendors know about an upcoming Proxy gig and suggest they help pack the hall. HealthSouth employees knew to be in the crowd too. This was known in the company as "purchased applause."

Scrushy needed applause the way he needed oxygen. But when the lights came up and real life resumed, he was terribly insecure. The kid from Selma was clothes-conscious and proud of his huge Hermes tie collection. At HealthSouth's Monday management meetings, discussion wasn't part of the drill. Officers made two-minute, numbers-packed reports, then braced for Scrushy's decrees and judgments. They might not get that far if he interrupted with his dreaded catch phrase: "That was the stupidest thing I ever heard."

Nothing was too small to incite King Richard's wrath, not even dust specks. Especially dust specks. Every HealthSouth facility was subject to a "pristine audit," a white-glove test conducted by Ernst & Young staffers with 50-point checklists. They may have missed billions in financial fraud, but they were great at finding dust bunnies. Woe to the person whose clinic failed the test or a Scrushy spot check. "It might be one o'clock in the morning, and he'd call at home to say, 'I'm out in your parking lot, and there's a piece of paper,'" says a former HealthSouth manager. "'Tell someone to get off his sorry sleeping ass, get out here, and pick it up!'"

One of the few people who could say no to Scrushy was his wife, Karen. They had four children and a tempestuous relationship, partly because she wouldn't back off. "It was kind of a love-hate thing," says a person who spent time with them. "But she was the only one who could get anywhere near to the truth with him."

If King Richard was a tyrant, why did his executives stick around? Partly it was because they knew the idea of HealthSouth was so good. Freestanding clinics were more efficient than big hospitals, and a consolidator could get economies of scale. Partly it was because HealthSouth paid so much better than other places. Could you get stock options at a nonprofit hospital? You could at HealthSouth, and they became quite valuable as the company's stock rose, at a 31% annual clip from 1987 to 1997. Partly it was the glamour. Dr. Andrews's sports-medicine clinic doubled as a celebrity intake center. Bo Jackson, Herschel Walker, Roger Clemens, and other superjocks would come in for treatment and leave as HealthSouth spokesmen.

Scrushy himself became a celebrity in Birmingham. He made big donations to Alabama schools, charities, and other causes. It was HealthSouth money that supported most of this philanthropy, but it was Scrushy's name that appeared on buildings, stadiums, and in the case of his community-college alma mater, a whole Richard M. Scrushy Campus.

Not everyone was enthralled by him. Scrushy was rejected for membership in the elite Birmingham Country Club--a reminder that in the eyes of Birmingham's old money, he still wasn't so far removed from the trailer park. When some society types did attend a charity roast for Scrushy, they recoiled at Bo Jackson's tribute: "Richard Scrushy fuckin' gets it done."

Scrushy had two responses to the bluebloods. One was to torture them at a favored enclave, Lake Martin, where he built a 14,000-square-foot mansion dwarfing the other houses and roared around in a cigarette boat. The other was to use HealthSouth's growing fleet of company jets to create, in effect, his own elite club. Politicians like Newt Gingrich and Orrin Hatch were HealthSouth frequent fliers. So were athletes like Troy Aikman. Scrushy okayed the jets' every use and accrued many favors.

He also used the jets a lot for business, because, starting in 1994, he went on an acquisitions binge. That year he doubled HealthSouth's size and catapulted it from the No. 3 company in the rehab-services industry to No. 1. HealthSouth became a $1 billion company.

Scrushy was just getting started. HealthSouth began the year 1995 with no surgical facilities. After four acquisitions totaling $1.3 billion, it was by year-end the country's biggest surgical-center operator. The people actually managing all these acquired businesses were run ragged. HealthSouth's antiquated technology made computer integration alone a nightmare. But Scrushy cared less about what people in the trenches thought than about what people on Wall Street did. His pay was closely tied to the stock price, and HealthSouth's shares rose 60% in 1995 alone. Scrushy was paid $7.4 million that year, more than twice his 1994 pay.

Maybe it was just too easy, maybe it was all that exposure to celebrities, or maybe Scrushy just started getting middle-aged crazy after reaching 40 in 1992. But somewhere along the line he started to believe his health-care-industry stardom was transferable to show biz. After all those years performing with Proxy, he decided to renounce his amateur status, turn to country music, and take some power lunches in Nashville.

Scrushy recruited professional musicians from the likes of the Oak Ridge Boys and Sawyer Brown. He named his new group Dallas County Line (Selma is part of Dallas County, Ala.), and their debut album was accompanied by a video that must be seen to be believed. There's Scrushy, dressed in black from the tip of his boots to the top of his cowboy hat, singing the CD's lead song, "Honk If You Love to Honky Tonk." The camera cuts from him to faces in a crowd that includes Bo Jackson, wrestler Lex Luger, NASCAR driver Bobby Allison, and, just for good measure, Neil Diamond.

Scrushy showed the video to applause at the HealthSouth annual meeting in 1995, though shareholders might have withheld it had they known how much company money was going into the band. Scrushy flew the band on HealthSouth jets from Nashville to Birmingham twice a week to rehearse. He and his sidemen also flew to Australia on a corporate jet for the Dallas County Line Down Under tour. The trip's business justification was due diligence for an acquisition there. And that explains HealthSouth's hospital in Melbourne, one of only four company facilities outside the U.S. There was a flaw with Dallas County Line, however: As a lead singer, Scrushy was no better than damn good--for a CEO. He finally had to face it: This was one enterprise he couldn't will to success. Dallas County Line broke up.

So did Scrushy's marriage. Fed up with his absences and his quirks, Karen filed for divorce and tore out Scrushy's heart. It was a big blow--he wept openly and often, friends say--and a bad omen for HealthSouth. The one person who could give Scrushy reality checks no longer wanted the job.

On the surface, life otherwise remained good. In 1997, HealthSouth's stock rose 44%, and Scrushy was America's third-highest-paid CEO, taking home $106 million. Most of that came from cashing in $93 million of stock options. But there were big problems below the surface. Congress passed a Medicare-overhaul bill that year, aimed at cutting payments from that program by $100 billion over a five-year period. HealthSouth stoutly maintained that its earnings wouldn't suffer, even though more than a third of its revenues came from Medicare. The company's stock thus didn't immediately suffer, at a time when Scrushy was exercising stock options.

Indeed, through the first part of 1998 the company's trajectory still seemed straight upward. It reached $4 billion in revenues, made the FORTUNE 500, and met or exceeded analyst earnings expectations for the 48th straight quarter. But in September, HealthSouth issued a warning: It would miss analyst estimates for 1998 and 1999, and its growth rate was markedly slowing. The company's stock plunged 43% in just two days, to $10.50.

This was not only the prequel to the events of 2002, when Scrushy again sold stock ahead of a profit warning, but also, according to the SEC suit, when the serious accounting fraud started. HealthSouth's profits had in fact been hurt by the Medicare cuts, and its multiyear acquisition binge was about over. There was simply little left to buy. The beauty of acquisition accounting--perfectly legal--was the room it allowed for all sorts of gimmicks and restatements, masking true operating performance. Now HealthSouth had to get more brazen about how it made its numbers.

It allegedly worked like this: Scrushy met monthly with company finance executives, who briefed him on operating results and how much profits lagged Wall Street expectations. "If we weren't making the numbers, he'd say, 'Go figure it out,'" said Mike Martin, CFO between 1997 and early 2000, in court testimony. Lower-level bean counters then inflated assets and used other creative accounting to plug the gap. Eleven of the co-conspirators, who called themselves the "family," have entered guilty pleas in connection with the fraud. From 1997 through mid-2002, according to the SEC, HealthSouth overstated its earnings by $2.5 billion. Its fictive profits were 2,500% higher than the true ones.

If Scrushy had been managing HealthSouth as closely as he once did, its true earnings might have been better and its need for fictive ones smaller. But he wasn't. He remarried in 1997 and promptly had two more children with his new wife, Leslie. He accumulated prodigious amounts of toys, including 34 cars. He had very expensive personal tastes and very high corporate overhead. "The corporate culture created the fraud, and the fraud created the corporate culture," says a former HealthSouth executive.

Scrushy was also involved in a growing number of other enterprises. One was MedPartners, a company based on the conceit that HealthSouth's savvy could be applied to the physician practice management business. It was a disaster (see "Vulgarians at the Gate" on, requiring Scrushy to plunge into salvaging it as acting CEO in 1998. Scrushy also had private stakes in companies that did much of their business with HealthSouth, including Source Medical Solutions, a specialty-software company, and MedCenters Direct, an Internet procurement concern. GG Enterprises, a company that sold millions of dollars of office equipment to HealthSouth, was owned by Scrushy's parents, Grace and Gerald.

Scrushy grew increasingly paranoid. At HealthSouth's new headquarters building, completed in 1997, there was a separate entrance and elevator for Scrushy and his top lieutenants. At the Monday meetings he was preceded by bodyguards. HealthSouth's current managers say they found that he could listen in on the phone calls of the senior executives on his floor from his secretary's phone; Scrushy denies he did any such surveillance. In 1998 some employees using pseudonyms began posting scathing comments about him and the company on the Yahoo message board. Scrushy ordered his security people to figure out who they were and stop them.

Meanwhile, his interests only strayed further afield, in particular back to show biz. HealthSouth had since 1996 staged "Go for It" road shows, in which stars from the company's stable of former jocks delivered inspirational messages to kids. Schools bused students by the thousands to arenas for it. In 2000 the show's producer made the mistake of suggesting that they add some music. Scrushy's inner impresario went wild. He contracted with an Orlando music producer who'd developed such synthetic teen groups as the Backstreet Boys to put together a girl group. The fellow assembled three perky young women and called them 3rd Faze, and Scrushy took it from there. He set up these Britney Spears wannabes with a snazzy choreographer, a sexy wardrobe, and in short order a record deal. Scrushy also transformed the "Go for It" road show into a promotional vehicle for the girl group. Teachers who'd brought their classes for inspirational messages instead found 3rd Faze shaking their booty. Some marched their kids right out.

But Scrushy wasn't through. He wanted to develop a Go for It TV show, also as a 3rd Faze showcase. That's how he came to meet one Jason Hervey, a former child actor who had played the obnoxious older brother Wayne on The Wonder Years TV series. Now he was a Hollywood producer. Scrushy was taken with him instantly and engaged him to produce the Go for It show. HealthSouth spent $13 million on two seasons, starting in 2001. Then Scrushy recruited Hervey to become a HealthSouth executive.

People at HealthSouth were shocked. Scrushy had taken a 29-year-old movie brat with no healthcare experience and put him in charge of marketing and communications. Hervey's main job, really, was to be the latest Scrushy sidekick. There was even more shock when some employees discovered, while Internet surfing, that Hervey's wife was a former porn star known as Angel Hart. But Scrushy rejected suggestions that Hervey, whose responsibilities included HealthSouth's children's programs, should be fired. (Scrushy declines to comment on the matter. Hervey didn't return calls.) The two became inseparable, as Hervey reinforced Scrushy's show business obsession. They cut quite a figure at last year's Grammy awards, attending with 3rd Faze in tow.

In a conference call with analysts on May 2, 2002, Scrushy said he was "very comfortable" with analyst estimates of 39% profit growth that year. On May 14 he sold $74 million of his stock, at $14 a share. Three days later, on May 17, in a development noted only by devoted healthcare bureaucrats, Medicare issued a clarification of payment rules for individual vs. group physical therapy. HealthSouth didn't seem to take note either, reaffirming its "guidance" for robust profits on July 11 and again on Aug. 7.

Yet on Aug. 27, when the company announced its $175 million shortfall, it suddenly attached major significance to the Medicare changes. That was a scant two weeks after the day corporate America's CEOs had to swear to the purity of their financials under the Sarbanes-Oxley Act. Not surprisingly, HealthSouth's stock tanked.

Scrushy insisted he didn't know of the Medicare issue until well after selling his stock on July 31 and making the "guidance" announcements. A company-commissioned review by the Fulbright & Jaworski law firm backed him up. But in mid-September the SEC notified HealthSouth it was being investigated.

Scrushy took to radio to proclaim his innocence. First it was on HealthSouth's weekly show on a Birmingham station, hitherto loosely related to health issues. It became a Richard Scrushy rant about how untrue and unfair it all was--especially the coverage in the New York Times and the Wall Street Journal. Then, in November, he started a twice-weekly program on another station, called the Richard & Jason Show. For two hours Scrushy and Hervey would banter, calling each other "Cowboy" and "Gator." They interviewed everyone from country stars to Parisian fashion consultants, talked about their weekend plans, even did commercials for a Florida Panhandle bar they frequented called the Live Bait.

Scrushy conducted his last staff meeting at HealthSouth on March 18. As usual, it was part intimidation. According to the transcript of a recording made by a HealthSouth executive wearing a wire at the FBI's request, he told the group, "I want each one of the [divisional] presidents to e-mail all of their people who miss their budget. I don't care whether it's by a dollar." It was also part pep talk. He'd just had lunch with two young doctors, he said, and they were "pumped, totally pumped. I said, 'Don't believe the newspaper.' And they said, 'We don't.' ... So let's keep our head down, let's keep pulling the wagon, let's keep moving the company forward."

And one other thing. He was cutting off access to Internet chatrooms from the HealthSouth computers.

That evening, after Scrushy had left, agents of the FBI and the SEC took over the executive suite and began gathering evidence.