Scrushy acquitted on all counts in HealthSouth fraud

BIRMINGHAM, Ala. -- HealthSouth Corp. founder Richard Scrushy walked away a free man Tuesday after a jury cleared him of all charges in a stunning setback for federal prosecutors who sought to add his name to a list of CEOs convicted of fraud.

Scrushy was the first of the high-profile chief executives to escape conviction since a wave of corporate scandals and indictments followed Enron Corp.'s collapse almost four years ago.

With all five former CFOs pleading guilty and testifying that Scrushy led a scheme to inflate earnings by $2.7 billion at the rehabilitation and medical services chain, some viewed the government's case as stronger than in other fraud trials.

Yet when it finished deliberations, the panel acquitted Scrushy of all 36 counts of fraud, false corporate reporting and making false statements to regulators.

Eight jurors who met with reporters after the verdict said key witnesses were not credible and the prosecution failed to present substantial evidence linking the fraud to Scrushy.

Scrushy still faces civil charges by the Securities and Exchange Commission which some experts say are more likely to be successful for the government.

likely to be successful for the government.

"I'm disappointed in the verdict," said U.S. Attorney Alice Martin, who plans to ask the 11th U.S. Circuit Court of Appeals to reinstate obstruction of justice and perjury charges that were thrown out earlier by U.S. District Judge Karon Bowdre.

Scrushy's acquittal contrasts with recent convictions of several former prominent CEOs for their roles in various frauds, including Tyco International's former chief L. Dennis Kozlowski, former WorldCom boss Bernard Ebbers and Adelphia Communications Corp. founder John Rigas.

A corporate law specialist who had followed Scrushy's trial was stunned at the verdict.

"There was a mass of evidence against him. I certainly expected the jury to convict. I thought the prosecution could get a fair hearing in Birmingham, but that appears not to be the case," said Larry Soderquist, director of the Corporate and Securities Law Institute at Vanderbilt University.

Soderquist noted that the defense appeared to appeal throughout the trial to the sympathies of the jury, composed of seven blacks and five whites. Soderquist said Scrushy, a white businessman, has "a very high reputation in the African-American community" as he took on a more visible role at black churches in the months after his indictment.

The decision came in the fifth day of deliberations after Bowdre replaced a sick, white juror with a black alternate and told the panel to start work anew.

Prominent black attorney Donald Watkins, who hugged Scrushy as the verdict was read, had reminded the jury in closing arguments of the struggles of the civil rights era in Alabama and how juries helped the movement succeed. Black ministers were also visible supporters of Scrushy in the courtroom throughout the trial.

Jurors told reporters after the verdict that race played no part in their views of the case. Instead, one juror said she expected the government to present "something more than hearsay."

"There were a lot of hopes that weren't fulfilled for me," she said.

Herman Henderson, a black pastor from Birmingham who attended the trial almost daily and helped organize support for Scrushy among the clergy, downplayed the importance of the jury's racial makeup. "I think that's an insult to the integrity of the black pastors," he said.

In all, 15 former HealthSouth executives have pleaded guilty since 2003, when the scandal erupted publicly and drove the company to the brink of bankruptcy.

The scandal had a devastating effect on HealthSouth, which teetered on the edge of bankruptcy for months despite once having more than 50,000 employees at 1,900 locations in all 50 states. Its stock traded around $30 a share before it was delisted from the New York Stock Exchange.

HealthSouth shares fell 5 cents to close at $5.93 in over-the-counter trading Tuesday. Layoffs and closings have reduced employment to about 41,000 people at 1,380 sites.

Scrushy was Alabama's best-known business leader at HealthSouth's height, an imperial CEO who dictated everything from T-shirt designs to seating in the executive dining room. He had a penchant for big boats, vintage cars and waterfront mansions.

But evidence showed Scrushy's company was in financial trouble almost from the start. Witnesses testified the conspiracy began in 1996, when they said HealthSouth switched from "aggressive accounting" to outright fraud at Scrushy's direction. Transcripts from closed-door hearings showed prosecutors had evidence the scheme began years earlier, as early as 1988, but decided against trying to prove it.

The first of executives to admit being part of the scheme pleaded guilty in March 2003. They told agents about inserting false numbers they called "dirt" or "pixie dust" to cover up earnings shortfalls, which they termed the "hole." The group even coined a name for itself: "the family."

The Scrushy defense blamed the fraud on that group, particularly the five finance chiefs who testified against him. One CFO, Bill Owens, came under withering defense attacks after agreeing to secretly record talks with Scrushy before both were fired.

Owens led the fraud, the defense claimed. He hid the scheme from Scrushy for years even after lower-level workers balked at continuing the fraud in mid-2002, when things began unraveling amid pressure from the new Sarbanes-Oxley act, which imposed stiff penalties for false financial statements.

Despite the full acquittal, Scrushy won't be rejoining the company he founded.

"Our Board of Directors declared Mr. Scrushy's contract null and void in March 2003," board chairman Bob May said in a statement. "The new Board and new management team 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. Under no circumstances will Mr. Scrushy be offered any position within the company by this management team or by this Board of Directors."

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Associated Press Writers Bob Johnson in Montgomery, Ala., and Marcy Gordon in Washington contributed to this report.