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SEC to pursue Richard Scrushy in civil court

Federal prosecutors last week failed in their attempt to hold former health care executive Richard M. Scrushy accountable for a $2.7 billion accounting fraud. Now the Securities and Exchange Commission is taking a crack.
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Federal prosecutors last week failed in their attempt to hold former health care executive Richard M. Scrushy accountable for a $2.7 billion accounting fraud. Now the Securities and Exchange Commission is taking a crack.

Thursday, the SEC will file court papers seeking a chance to pursue its case against Scrushy for the earnings inflation at HealthSouth Corp. The agency wants to forbid Scrushy, 52, from serving as an officer or director of another public company. It is also seeking $786 million in penalties and disgorgement.

But whether the SEC will succeed where criminal authorities stumbled is far from clear, experts said.

U.S. District Judge Inge P. Johnson last week ordered the agency to "show cause . . . why this case should not be dismissed."

Two years ago, the same judge rejected the agency's attempt to freeze hundreds of millions of dollars in Scrushy's cash and property after an unusual 11-day hearing in Birmingham. The SEC sought to protect the assets so eventually they could be distributed to investors who lost money after the fraud came to light.

"Evidence of defendant Scrushy's involvement in the alleged scheme to inflate profits . . . is lacking," the judge wrote in a May 2003 opinion.

She added that testimony from former HealthSouth finance chiefs who pleaded guilty to taking part in the scheme lacked credibility and called a secret recording of Scrushy talking about the company's financial problems "ambivalent at best."

Similar doubts also were cited by jurors who last week acquitted Scrushy on three dozen fraud, conspiracy and money-laundering charges in a trial that featured testimony from all five of the company's former finance officials. Scrushy could have faced decades behind bars if he had been convicted.

Arthur W. Leach, a lawyer for Scrushy, said he hopes the jury verdict "has caused Judge Johnson to have increased questions about the strength and the merit of the SEC case." Leach noted that the judge in the criminal trial had ruled that Justice Department prosecutors and securities investigators had colluded in a way that violated Scrushy's rights -- a decision that resulted in Scrushy's SEC deposition being tossed out of the criminal case.

John Nester, an agency spokesman, declined to comment on the substance of the agency's argument but said the SEC would pursue its case.

"It's extremely rare that this situation happens, and it's something nobody at the SEC will be happy about," said Gregory S. Bruch, a former agency lawyer and a partner at Foley & Lardner LLP in the District. "Judges generally don't like the government taking multiple shots at people on the same set of facts."

Civil claims such as those filed by the SEC must be proved by a preponderance of the evidence -- a far lower burden than the reasonable-doubt standard necessary for a criminal conviction. Experts added that the agency is charging Scrushy with failing to follow accounting procedures and other new allegations not contained in his criminal indictment.

In addition, the SEC may be able to sharpen its case based on lessons it gleans from the failed criminal prosecution.

"I don't know how much mileage Scrushy can get out of this acquittal," said Steven R. Smith, a securities lawyer at Bryan Cave LLP.

Derek M. Meisner, a former SEC lawyer now at Kirkpatrick & Lockhart Nicholson Graham LLP, said agency officials might consider settling with Scrushy rather than trying their luck in court. Lawyers for Scrushy said last week that he wants to return to HealthSouth, where he remains a member of the board.

But the rehabilitation hospital company's new managers decreed that Scrushy, HealthSouth's largest individual shareholder, would not be welcome under any circumstances. Institutional shareholders and money managers have echoed that sentiment.

The company's board has been holding special committee meetings, without Scrushy, for the past two years. HealthSouth expects to hold a formal shareholder meeting as soon as its financial statements are up to date -- perhaps as early as the first quarter of 2006, spokesman Andy Brimmer said. The company does not plan to include Scrushy on the slate of board candidates.