HealthSouth Founder Scrushy Acquitted on All Counts

BIRMINGHAM, Ala. – HealthSouth Corp. (search) founder Richard Scrushy (search), who was accused of directing a $2.7 billion accounting fraud at the medical rehabilitation chain, on Tuesday was found not guilty on all counts by a federal jury in Birmingham, Ala.

The verdict was reached after more than 20 days of deliberation and a five-month trial.

Scrushy, 52, was accused of directing the $2.7 billion accounting scam from 1996 to 2002 at the health-care company he founded in a bid to inflate its stock price and enrich himself.

Scrushy was the first chief executive accused of violating the Sarbanes-Oxley act (search), a corporate reform measure passed three years ago in response to a string of scandals. He faced 36 charges whittled down from the original 85-count indictment, including conspiracy, false reporting to the Securities and Exchange Commission (search), multiple fraud counts and money laundering.

Had he been found guilty, Scrushy could have spent the rest of his life in jail and been forced to forfeit millions of dollars and personal property, including multiple homes, luxury boats and airplanes.

After the verdict, Scrushy hugged his wife, his lawyers and Bishop Jim Lowe, pastor of predominantly black Guiding Light Church Scrushy joined after his indictment in what some critics called an attempt to influence the potential jury pool.

"I'm going to go to a church and pray," Scrushy said as he left the courthouse. "I'm going to be with my family. Thank God for this."

A corporate law specialist who had followed the trial was stunned. "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.

The jury of seven men and five women began deliberating on May 19. Earlier this month, jurors told U.S. District Judge Karon Bowdre they could not reach a verdict on any of the 36 charges against Scrushy. She issued an "Allen charge (search)" instructing them to try harder to break the deadlock.

Jurors, speaking to reporters afterward, said there wasn't enough hard evidence with Scrushy's fingerprints on it.

"The fraud was there," said a male juror. "The smoking gun wasn't."

Added a female juror: "There was reasonable doubt."

Scrushy was Alabama's best-known business leader at HealthSouth's height, a high-flying, 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.

Always a promoter, Scrushy seemed to relish TV appearances where he talked up HealthSouth stock. Thanks to millions of dollars of philanthropy, Scrushy's name was soon on roads, buildings and playing fields around the state and particularly in Birmingham, where HealthSouth is based.

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 15 corporate officers and midlevel accounting executives to admit being part of the scheme pleaded guilty in March 2003, when the government filed suit against HealthSouth and Scrushy alleging a massive fraud. They told agents about inserting false numbers they called "dirt" or "pixie dust" to cover up earnings shortfalls, which they termed the "hole."

Gathering in conference rooms and offices to figure out how much fraud was needed each quarter to make it appear HealthSouth was meeting forecasts, 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 worked under Scrushy and 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 Sarbanes-Oxley act, which imposed stiff penalties for false financial statements.

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 and a stock price around $30.

Today, HealthSouth stock trades around $6 after being delisted from the New York Stock Exchange (search). Layoffs and closings reduced employment to about 41,000 people at 1,380 sites.

Reuters and the Associated Press contributed to this report.