ATLANTA - Richard M. Scrushy may live to regret one of his last autographs as the head of HealthSouth Corp.
Jurors in Birmingham, Ala., are deliberating the fate of Scrushy, 52, who essentially faces life behind bars and $278 million in forfeited assets if he's convicted of overseeing a $2.7 billion accounting fraud at his health care company.
Scrushy, who made a fortune at his Birmingham startup by turning physical therapy into a national network of clinics in the 1980s, now is the first chief executive to be tried under the Sarbanes-Oxley Act. Prosecutors in the case are under pressure to get a conviction, as corporate watchdogs all over the country are waiting to see if the new law has any teeth.
The long-running scheme outlined by prosecutors in which executives and accounting clerks alike allegedly cooked the books for seven years to pump up HealthSouth's stock price, has been held up as a poster child for why the nation needs a law on corporate accountability like the Sarbanes-Oxley Act.
Enacted three years ago to restore investor confidence after a string of scandals on Wall Street, Sarbanes-Oxley carries stiff penalties and prison time for white-collar criminals. The law zipped through Congress after frauds at Enron Corp. and WorldCom Inc. drove those companies into bankruptcy and cost investors billions.
The cover blew off the alleged fraud at HealthSouth shortly after the law took effect in 2002, when Weston Smith, then chief financial officer, refused to sign off on an allegedly doctored quarterly report, touching off a panic at corporate headquarters.
Smith eventually signed the report, but the pressure allegedly was too much for him. Within a few months, he became the first former executive to strike a deal with prosecutors, kicking off a plea-bargain stampede that rounded up guilty pleas from more than a dozen cohorts.
"When [the CFO] said "I'm not signing this sucker,' it all started to unravel," said John Carroll, dean of the Cumberland School of Law at Samford University in Birmingham. "In some aspects, it came down to that signature."
Scrushy, who didn't testify at his trial, contends that he never knew about the fraud. The fired CEO says a group of underlings, known inside HealthSouth as "the family," committed the fraud on their own and hid it from him.
"The Justice Department was waiting on a test case [for Sarbanes-Oxley], and this was a great case because there are so many witnesses and so much evidence," said attorney Steve Smith, partner at the Bryan Cave law firm in Chicago.
All but one of the 36 remaining counts against Scrushy - spanning conspiracy, fraud and money laundering - fall under laws that existed before Sarbanes-Oxley took effect.
The lone Sarbanes-Oxley count, charging conspiracy, boils down to one signature penned just before the allegations became public - Scrushy signed off on an allegedly bogus financial statement.
Chief executives and chief financial officers have always signed financial statements, but today those signatures are considered a personal affidavit that they've ensured that the numbers are accurate. In addition to civil penalties, the law provides for unprecedented criminal penalties.
"If you look at this as the screw that opened up the HealthSouth fraud, then Sarbanes-Oxley can be considered the ultimate test, regardless of whether the government gets a conviction," said Ebb Oakley III, a professor of law and ethics at Georgia State University. "The real test is not how many convictions prosecutors can get [under Sarbanes-Oxley] but rather, is the law working as far as stopping fraud?"
Because of Sarbanes-Oxley, large public companies are now requiring division heads to sign off on financial statements, as well as CEOs and chief financial officers, pushing the responsibility for accuracy further down the chain and putting the pressure on more people to put their necks on the line, Oakley said.
But even if Scrushy walks, that doesn't sound a death knell for Sarbanes-Oxley, some legal experts said.
"If a jury acquits him, it's on the basis of evidence, which is fact-specific. That doesn't provide any insight on the law," said Pam Bucy, a University of Alabama law professor and former federal prosecutor.
"In most white-collar cases, the defendant works out a plea [bargain], so it's significant that Sarbanes-Oxley made it all the way to a jury," Bucy said. "What would be really significant is if he gets convicted and it goes on appeal. Then we'll get an appellate court talking about Sarbanes-Oxley."
