Scrushy-HealthSouth Fraud Trial Opens

Richard Scrushy's (search) trial on corporate fraud charges opened Tuesday with a prosecutor telling jurors the fired HealthSouth (search) CEO was the driving force behind a conspiracy to overstate earnings in the rehabilitation giant by about $2.7 billion.

With underlings generating bogus financial statements to make it appear HealthSouth Corp. was meeting Wall Street forecasts from 1996 through 2002, a prosecutor argued, Scrushy sold about $150 million worth of his own HealthSouth stock and spent more than $200 million on a lavish lifestyle.

All the while, Scrushy was getting private reports on the company's true financial condition, but he never told investors what was going on, U.S. Attorney Alice Martin told jurors in opening statements.

"They pumped up the profits, and he hid it from the public," said Martin. She described Scrushy as "a very hands-on leader" who personally selected top aides and tried to sway their statements to federal agents once an investigation began.

"The evidence will show that Richard Scrushy as chief executive officer gave phony numbers to the public," Martin said.

The defense conceded that a fraud occurred, but Scrushy lawyer Jim Parkman blamed it on a group of overly ambitious, tightly knit executives who called themselves "the family" — a group, he said, that hid the misstatements from Scrushy.

"This was no ordinary family. This was a family that operated as a unit on their own," said Parkman.

In a deep, folksy drawl that contrasted with Martin's more businesslike approach, Parkman portrayed the Alabama-born Scrushy as an everyman CEO from humble beginnings who did his best yet failed to detect fraud that also eluded graduates of top Ivy League schools.

"How could it get by Richard Scrushy? You know how? This group controlled the numbers," Parkman said.

In an early attack on a key government witness, Parkman described former chief financial officer Williams Owens as "the godfather" of the conspirators, casting doubt on the man who prosecutors say helped cement their case by secretly recording discussions with Scrushy.

Scrushy sat quietly at the defense table as court began, wife Leslie seated behind him at the front of a courtroom crowded by more than 120 people. Dozens more watched from another room by closed-circuit TV.

Scrushy, 52, was named in a 58-count indictment accusing him of fraud, conspiracy, obstruction of justice, perjury, money laundering and false corporate reporting, the first test of the 2002 Sarbanes-Oxley Act (search). Prosecutors are seeking $278 million in personal assets, including waterfront homes, luxury cars and a yacht, as well as a prison sentence that could amount to life if convicted.

U.S. District Judge Karon Bowdre told the jury of 12 members and six alternates not to be swayed by testimony about Scrushy's riches.

"Mr. Scrushy is not on trial for making and spending money," she said. "The real focus of your inquiry is whether Mr. Scrushy knowingly participated in the fraud at HealthSouth."

As the trial began, Bowdre granted a defense request to limit testimony about investor losses in the massive accounting scandal. A court in a related case previously sided with prosecutors who argued the fraud cost stockholders some $328 million.

The defense said it will not contest whether the fraud took place, so jurors don't need to hear about the losses. Instead, it will try to show that other executives perpetrated the conspiracy by purposely hiding it from Scrushy, HealthSouth's primary founder in 1984.

Bowdre told the jury that numerous civil suit have been filed over the HealthSouth debacle, so they didn't need to hear about shareholders' losses.

"Civil responsibility and criminal guilt are separate matters," she said.

The defense said it expected prosecutors to present testimony by all five of HealthSouth's chief financial officers under Scrushy, with each claiming they had "direct conversations" with Scrushy about the scheme. The five have agreed to plead guilty in the criminal fraud case, which surfaced in March 2003 when the Securities and Exchange Commission (search) filed a civil suit against HealthSouth and Scrushy.

By the end of that month, Scrushy had been fired and the first of 15 former HealthSouth executives had agreed to plead guilty.