BIRMINGHAM – Richard Scrushy (search), the flamboyant founder and former chief executive of scandal-rocked HealthSouth Corp. (HSA), finally gets to face his accusers when his criminal trial begins this month.
After months of verbal and legal sparring, jury selection is set to begin on Wednesday, with opening arguments scheduled for Jan. 18 in a trial expected to last 10 to 12 weeks.
The trial will provide the first major legal test of the new Sarbanes-Oxley corporate reform laws (search), which were designed to hold high-ranking executives accountable for any false financial statements filed under their watch. The law set much stiffer penalties, including jail time, for offenders.
How it plays out will likely be closely watched by the likes of former Enron Corp. (search) chief Kenneth Lay (search) and other high-profile corporate executives facing criminal and securities charges under the new statute, legal experts said.
Scrushy, who has been free on a $10 million bond, faces a 58-count indictment on charges that include conspiracy to commit fraud, filing false financial statements, securities and wire fraud and money laundering at the Birmingham-based health-care company he built into an industry leader.
Prosecutors accuse Scrushy of directing a fraud in which they say company earnings and assets were inflated by some $2.6 billion over several years in order to manipulate share prices. Current HealthSouth executives estimate that bogus accounting was likely in excess of $4 billion.
Scrushy has vehemently maintained his innocence, claiming the fraud was perpetrated by his underlings without his knowledge. But former officials and prosecutors say he was a micro-manager who had his hand in all company details.
"It will be his knowledge, his intent and his actions that is the battleground that both sides will be fighting on in front of the jury," said Eric Rieder, an expert in securities enforcement and compliance at Bryan Cave LLP in New York.
Seventeen former HealthSouth executives, including all five former chief financial officers, have pleaded guilty to a variety of fraud charges in connection with the scandal that left the once-thriving company on life support. Several of them are expected to be key witnesses for the prosecution.
The trial will set standards that could be followed in all future cases involving Sarbanes-Oxley, according to Kenneth Rosen, a University of Alabama Law School professor.
"Early cases are closely followed by those seeking to understand how the statute will be applied in future cases," Rosen said.
Scrushy's defense team challenged the use of Sarbanes-Oxley, arguing it is too vague and broad in scope.
Judge Karon Bowdre dismissed the challenge in late November, asking the rhetorical question: "Hasn't certifying a document that is materially false been illegal all along?"
Also in November, Scrushy replaced his high-profile Washington-based legal team headed by Abbe Lowell and Thomas Sjoblom in favor of home-grown representation that might play better in front of an Alabama jury.
"It is a challenge," said Scrushy's new lead attorney James Parkman. "I would have liked to have had time for more analysis, but it was not an insurmountable difficulty."
If convicted of all charges, Scrushy faces up to 650 years of prison time and more than $36 million in fines, plus forfeiture of any so-called ill-gotten gains, possibly including several residences, boats, planes and luxury cars.
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