Scrushy Indicted on 85 Counts

Former HealthSouth chief added roughly $2.7 billion in fictitious earnings, alleges the Department of Justice. Also: SEC chief in Boston resigns; Deloitte departs as auditor of Energy Conversion Devices; and more.


The Justice Department Tuesday indicted former HealthSouth Corp. CEO Richard Scrushy on 85 criminal counts “stemming from a wide-ranging scheme to defraud investors, the public and the U.S. government about HealthSouth’s financial condition.”

Scrushy, who surrendered at FBI Headquarters in Birmingham, Alabama, is accused of overseeing a scheme to deliberately inflate HealthSouth’s earnings and assets by roughly $2.7 billion over several years. He becomes one of the highest-ranking corporate executives to be indicted since the recent wave of scandals began about two years ago with the bankruptcy of Enron Corp.

The indictment was returned by a federal grand jury in Birmingham last Wednesday and unsealed Tuesday morning, said the Department of Justice. It charges Scrushy with conspiracy; mail, wire and securities fraud; filing false statements and false certifications; and money laundering.

If convicted of all charges, Scrushy faces a possible sentence of 650 years in prison and more than $36 million in fines. The indictment also seeks forfeiture of more than $278.7 million in property that Scrushy derived from proceeds of the alleged offenses, including several residences, boats, aircraft, and luxury automobiles.

“Richard Scrushy and his accomplices lied,” said Assistant Attorney General Christopher Wray, in a statement. “They cooked HealthSouth’s books and Scrushy personally vouched for false financial statements with the SEC to cover up their scheme.”

Wray then issued a warning to Corporate America: “These charges show that the government has important new tools to hold executives accountable for corporate fraud, and we won’t hesitate to use them where the evidence warrants it.”

Since the HealthSouth scandal broke, Scrushy has been employing what might be called the Sgt. Schultz defense — he knows “nothing, nothing.”

In an interview with “60 Minutes” last month, Scrushy said he signed off on fraudulent accounting figures because he trusted the five CFOs who had served the company Scrushy helped found in 1984. When interviewer Mike Wallace pointed out that Scrushy was in charge, the former executive responded, “That doesn’t mean I’m a criminal.”

In its indictment, the Justice Department alleges that while Scrushy was HealthSouth’s CEO and chairman of the board, he “personally participated in the preparation of financial statements and other financial documents,” and that he caused HealthSouth to falsify financial statements, making the company appear more successful than it actually was.

Scrushy served as chairman of the board from 1984 through early 2003; he also served as chief executive officer during that time, except for periods in late 2002 and early 2003.

The indictment alleges that between 1996 and 2003, internal reports by HealthSouth’s corporate accounting staff showed that the company routinely failed to produce sufficient net income to meet the expectations of Wall Street securities analysts, the market, and its own internal budgets — a failure that Scrushy and others allegedly referred to as “not making the numbers.”

According to the indictment, Scrushy and others devised a scheme to inflate HealthSouth’s earnings by making false and fraudulent entries in HealthSouth’s books and records, including the income statement and balance sheet accounts — methods referred to by the co-conspirators as “filling the hole” or “filling the gap.”

The Justice Department also alleges that Scrushy knowingly signed false statements to the SEC, including a false quarterly report for the third quarter of 2002, in violation of the recently enacted Sarbanes-Oxley Act.

The scheme added roughly $2.7 billion in fictitious earnings during the course of the conspiracy, according to the indictment.

Scrushy and other HealthSouth executives received salaries, bonuses, stock options, and other benefits that were tied, directly or indirectly, to the company’s financial performance, the government pointed out. From 1996 through 2002, Scrushy received approximately $267 million in compensation from HealthSouth, including $7.5 million in base salary, more than $53 million in bonuses, and stock options valued at more than $206 million when exercised, noted the Justice Department.

The indictment seeks forfeiture of all gains derived from Scrushy’s allegedly criminal activity, totaling nearly $279 million. They include several residences in Alabama; property in Palm Beach, Florida; a 92-foot yacht and two other watercraft; two private aircraft; diamond jewelry; several luxury automobiles; and paintings by Picasso, Chagall, Renoir, and others.

So far, 15 former HealthSouth executives, including the five CFOs who served under Scrushy, have pleaded guilty for their roles in the scheme.

Scrushy’s indictment comes one day after The Wall Street Journal reported that former HealthSouth Corp. executives gave themselves and other officials company money totaling more than $500,000 to pay for legal fees before many of them pleaded guilty to defrauding investors.

The paper, citing company records, said the payments were provided from March 3 to March 21 to pay for lawyers for 10 of the 15 former executives who have pleaded guilty.

SEC Chief in Boston Resigns

Portfolio managers and brokers are not the only ones who have lost their jobs due to the widening probe of mutual funds.

Juan M. Marcelino, who headed up the Boston office of the Securities and Exchange Commission for more than 10 years, resigned on Monday after reports that his office had received information about improper trading at Putnam Investments but failed to take action, according to The Boston Globe.

Over the weekend, Putnam chief executive Lawrence J. Lasser quit as his company faced state and federal fraud charges.

On October 24, the Globe reported that the SEC had information about alleged improper trading activities at Putnam as long ago as March from a whistle-blower who had spent two-and-a-half years at the mutual fund company. The whistle-blower, Peter Scannell, provided documents showing a pattern of market timing by some of Putnam’s customers, the paper noted.

Phil Koski, the SEC attorney who spent an hour with Scannell, promised to follow up with the former Putnam employee but never did, according to the Globe.

On September 11, Scannell took his documents to the Massachusetts Securities Division. Led by Secretary of State William F. Galvin, the office issued subpoenas within hours seeking information from Putnam, the paper said.

An SEC statement said that “Mr. Marcelino indicated that he had decided to step aside as the district administrator, given the recent press coverage of certain matters involving the Boston office, to minimize any further distractions for his staff as they continue the critical work of the office.” Marcelino had no comment for the Globe other than to acknowledge his resignation.

Marcelino had headed the Boston office since 1993 after 10 years as a staff attorney in the SEC’s Division of Enforcement in Washington.

Deloitte Departs as Auditor of Energy Conversion Devices

Fuel-cell manufacturer Energy Conversion Devices Inc. said its independent auditors, Deloitte & Touche LLP, declined to stand for reelection as ECD’s independent auditors.

The company announced on October 30 that it received a letter from Deloitte confirming that the “client-auditor relationship between Energy Conversion Devices Inc. and Deloitte & Touche LLP has ceased.”

In a press release, ECD stated that in connection with the audits of the company’s two most recent fiscal years and for the period July 1 through October 30, 2003, there were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Such disagreements, added ECD, if they were not resolved to the satisfaction of Deloitte, would have cited by the auditing firm on ECD’s consolidated financial statements.

ECD added it has had a close working relationship with Deloitte and its predecessor firms since they began their engagement in 1968 as ECD’s independent auditors. Severing the relationship was not recommended or approved by ECD’s board or its audit committee said the company, which has begun the search for an new independent auditor.

On September 29, Energy Conversion said it would delay the release of its annual report, and that its auditors might question whether the company could continue as a going concern if it is unable to raise the required funding.

Short Takes

  • Tyco International Ltd. took a $1.2 billion charge to eliminate 7,200 jobs, exit more than 50 business lines, and sell its undersea fiber-optic cable network.
  • Masco Corp. named two new directors. One is J. Michael Losh, formerly executive vice president and chief financial officer of General Motors from July 1994 through August 2000. He also served as chairman of GMAC, GM’s financial services group, from July 1994 until April 1999.

The other new director is Prof. David L. Johnston, who has served as president and vice chancellor of the University of Waterloo in Ontario, Canada, since July 1, 1999. Johnston is a specialist in securities regulation, corporation law, and information technology law, according to the company.

  • Berkshire Hathaway Inc. said its board voted to increase the number of directors to 11 from 9. The new members are David Gottesman, a co-managing partner of investment advisory firm First Manhattan Co., and Charlotte Guyman, a former Microsoft Corp. employee currently on the board of the University of Washington Medical School.
  • Specialty retailer Claire’s Stores Inc. said its board declared a two-for-one split. It also said its dividend would remain at its current per-share level rather than being adjusted downward to reflect the stock split, effectively doubling the dividend payout.
  • Max Re Capital Ltd. said it will increase its quarterly dividend payment to 3 cents a share from 2 cents.
  • General Electric Co. retirees, who have complained about their puny pension benefits, will receive a special one-time benefit payment next month, GE announced on Monday. The special payment, equal to one month’s basic pension benefit, will go to about 142,000 eligible retirees, said the company in a statement. It will be included in December’s pension checks.

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