Ousted HealthSouth Corp. chief executive Richard M. Scrushy has been ordered by a Delaware judge to repay $25 million in loans he took from the Alabama-based hospital company in 1999.
In a decision that Scrushy's defense team called "unprecedented," Vice Chancellor Leo E. Strine Jr. ruled that Scrushy, who sought to settle the loans in 2002 with HealthSouth stock that soon proved to be virtually worthless, should give the company $25.2 million in cash.
"Through conscious wrongdoing, negligent oversight of his subordinates, or innocent failure to catch the misdeeds or inaccuracies of his underlings, Scrushy signed financial statements for HealthSouth that were materially inaccurate," the judge wrote in a 26-page opinion, which was released Monday.
Strine found that Scrushy was "undoubtedly unjustly enriched" when the company accepted shares from him at a price that was artificially inflated based on phony financial statements. Scrushy has been charged with masterminding a $2.7 billion accounting fraud to pump up the company's stock price.
Abbe D. Lowell, the lead defense attorney for Scrushy, yesterday vowed to appeal. Lowell also fired back at federal prosecutors, filing court papers seeking the release of more than $79 million in bank accounts and other Scrushy assets the government has frozen.
"They have liens on his property, they have impounded his vehicles, they have frozen his bank and investment accounts," Lowell said. "They have basically put a lock" on his coffers.
Scrushy was charged last month with 85 counts, including conspiracy, money laundering, securities fraud and mail fraud. At that time, the government sought to freeze some $280 million in allegedly ill-gotten assets belonging to Scrushy, including a yacht, a Cessna jet, luxury automobiles, and paintings by Pablo Picasso and Joan Miro. Scrushy has professed his innocence and has blamed the long-running earnings-manipulation scheme on subordinates. To date, 15 former HealthSouth officials have pleaded guilty to conspiracy, tax and related charges.
Legal experts said the Delaware ruling on executive loans involved a novel legal theory. The plaintiffs, lawyers independently bringing an action on behalf of HealthSouth, argued that Scrushy was responsible for the accuracy of the company's financial statements and that he improperly benefited from the decline in the company's stock price. The plaintiffs did not claim, and the judge did not find, that Scrushy had direct knowledge of the accounting fraud at HealthSouth. Earlier this week, the bankruptcy examiner seeking to recover assets for Enron Corp. used similar reasoning in a report suggesting that former chief executives Kenneth L. Lay and Jeffrey K. Skilling should return about $96 million in loans they repaid with now-valueless company stock.
Less than a month after Scrushy repaid his $25 million loan with HealthSouth stock in 2002, the company issued a news release reducing projected earnings by approximately $175 million, according to court papers. The company's stock plunged, dipping even lower earlier this year, when HealthSouth announced more than $400 million in write-offs and several of its officials pleaded guilty to fraud charges.
"We consider the victory to be the first in what we hope to be many instances of return of money that was wrongly taken from the company," said John Somerville, a Birmingham lawyer helping to represent plaintiffs in the case.
Two corporate lawyers who asked not to be identified by name yesterday cast doubt on the success of a Scrushy appeal, saying that Strine is one of the most well-respected members of the court and that he backed up his opinion with stringent reasoning.
Separately, Scrushy's defense team argued in court papers filed yesterday that the government overreached in attempts to freeze the assets of their client, who is facing a "cash crunch," they said. For instance, Lowell said, the government wants to seize property and other items that Scrushy purchased before 1996, when prosecutors claim the fraud began.
U.S. Attorney Alice H. Martin, who has spearheaded the ongoing probe into HealthSouth's finances, said in an interview yesterday that her office is working with Scrushy's defense team to examine whether some assets had been frozen without proof they were tied to the alleged fraud.