updated 12/9/2003 3:52:48 PM ET 2003-12-09T20:52:48

Attorneys for ousted HealthSouth chief Richard Scrushy said Tuesday they will challenge a new federal law aimed at false corporate reports and used for the first time against Scrushy in a massive accounting fraud case.

In a meeting with U.S. District Judge T. Michael Putnam, the Scrushy defense team said they would seek to overturn what is known as the Sarbanes-Oxley Act, which was passed in the wake of scandals at Enron, WorldCom and other corporate giants.

The law requires chief executives and chief financial officers to certify their company's financial statements as accurate and holds them criminally liable for falsehoods. Scrushy, who was CEO of the rehabilitation services company, is accused of signing off on false earnings reports in a scheme that inflated numbers for his own enrichment.

Scrushy attorney Abbe Lowell declined to give details, but he said such a legal challenge is common where a law is being used for the first time.

U.S. Attorney Alice Martin said the move had been anticipated and that her office and the Justice Department would work together to defend the new law.

While Scrushy is currently set for trial Feb. 2, both sides agreed that a delay was needed because of the expected challenge to the law and the fact the government has said it has more than 1 million documents to turn over to the defense.

Martin said she would ask the defense to agree to a trial date in August. Lowell was noncommittal on whether that would be acceptable to the defense.

Scrushy, 51, faces an 85-count indictment that charges him with conspiracy, wire fraud, mail fraud, securities fraud and money laundering. He is accused of directing accounting fraud at HealthSouth that inflated profit, revenue and assets by $2.7 billion since 1996.

Separately, a lawyer for Scrushy denied a filing by authorities that says Scrushy has used fraudulently obtained money to pay $21 million in legal fees.

An affidavit signed by Internal Revenue Service agent Charles Traywick, filed with the court Friday, said Scrushy paid Birmingham attorney Donald Watkins' firm a total of $5.5 million, with three other law firms getting a total of nearly $16 million.

The payments "have been identified as having been made by defendant Scrushy from accounts containing substantial deposits of proceeds from crimes charged in the indictment," Traywick said in the affidavit.

Scrushy attorney Thomas Sjoblom said Monday his client's legal fees are being paid from money he earned before 1996.

"It's grave error for the government to suggest that the law firms have received fruits of a crime or ill-gotten gains," Sjoblom said.

Copyright 2003 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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