Trial opens in lawsuit by investors over HealthSouth fraud, seeking $2.6B from founder Scrushy

HealthSouth civil lawsuit seeks $2.6B from Scrushy

BIRMINGHAM, Ala. — Shareholders want HealthSouth Corp.’s founder Richard Scrushy to pay $2.6 billion for his alleged role in a huge fraud that nearly ruined the rehabilitation company, attorneys told a judge Monday.

A lawsuit, filed by stockholders on behalf of the company, seeks to make Scrushy repay HealthSouth for salary, bonuses and stock deals during the years of the accounting scheme, for hundreds of personal plane flights for him and his family and breast implants for a female singer he was promoting.

Once known for his flashy style, Scrushy, who was fired, could be ordered to pay most of the cost of a long-running conspiracy uncovered in 2003, even though court documents indicate he doesn’t have the money and is in prison for a federal bribery conviction.

A defense attorney said Scrushy was an unwitting victim of the deception, just like others. Evidence showed top company executives cooked the books for about seven years, overstating revenues and assets by millions each quarter to hide that it wasn’t meeting Wall Street projections.

Scrushy, 56, is expected to give his first public testimony about the scandal during the civil trial that is being heard by Circuit Judge Allwin E. Horn without a jury in Birmingham.

Much of the testimony could be a rehash of Scrushy’s 2005 criminal trial on federal fraud charges, which ended in his acquittal. He was convicted in 2006 of federal bribery charges for arranging $500,000 in contributions to the Alabama lottery in exchange for a seat on a state regulatory board.

The two sides in the civil trial do agree on a key issue: A swindle did occur at HealthSouth, which Scrushy founded with a small group of investors in 1985 and ran for nearly two decades as CEO. They disagree on who is to blame.

John W. Haley, an attorney for shareholders, said Scrushy put the scheme in motion in 1996 when two subordinates, finance chief Aaron Beam and controller Bill Owens, told him HealthSouth wouldn’t meet its earnings forecast, which Scrushy wanted to avoid.

“Fix the numbers,” Haley quoted Scrushy as saying.

An attorney for Scrushy, Jack McNamee, argued the company wrongly blames his client for crimes committed by others. Saying “fix it” hardly amounts to ordering a swindle and coverup, he said.

“It doesn’t mean do anything illegal. It doesn’t mean fraud,” said McNamee.

The plaintiffs’ lawyers are relying on testimony of a former controller and five finance chiefs who will say Scrushy was in on the scheme, McNamee said. All are “self-confessed liars,” he said, and all the CFOs pleaded guilty in the scam.

The finance chiefs — including Beam and Owens — told jurors in Scrushy’s criminal trial that he directed them to make it look like HealthSouth was meeting earnings forecasts when it wasn’t. Jurors sided with defense claims that Scrushy was duped by underlings.

Haley said even if Scrushy wasn’t part of the scheme, he failed in his duty as chief executive to know what was going on.

Haley also accused Scrushy of looting HealthSouth for hundreds of flights aboard its airplanes and helicopters and charging the company for a country band fronted by Scrushy called Dallas County Line. Haley showed the judge a video of the band with Scrushy as lead singer, prompting laughter in the courtroom.

When Scrushy decided he wanted to be a record producer, HealthSouth footed the bills for an all-female singing group called 3rd Faze and even paid the $4,600 bill for breast implants for a singer, Haley said.

HealthSouth also bought $60 million worth of computers from a company fronted by Scrushy’s parents, Haley said.

McNamee depicted Scrushy as a dynamic CEO with little background in finance, a leader who was betrayed by the 15 people who pleaded guilty to federal charges of participating in crimes at HealthSouth.

“There is no evidence from any document that Richard knew anything about it,” he said. Scrushy repaid the company for many of the flights and other perks he received, McNamee said.

Testimony could last two weeks, but it’s unclear when Scrushy will take the stand. He was held at a Birmingham-area jail awaiting his turn.

Pushed to the edge of bankruptcy once the deception was uncovered six years ago, HealthSouth now operates in 26 states. It calls itself the largest U.S. provider of inpatient rehabilitation services with hospitals, outpatient rehabilitation offices and home health services.

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