The ousted chief executive of one of the nation's largest health care chains was indicted yesterday on charges that he directed a $2.7 billion fraud designed to boost the company's stock price and to bankroll an extravagant lifestyle that included a Lamborghini, a 92-foot yacht, and paintings by Picasso and Renoir.
Richard M. Scrushy, 51, who founded HealthSouth Corp., surrendered to the FBI early yesterday in Birmingham and later pleaded not guilty to the 85-count indictment that includes charges of conspiracy, money laundering, securities fraud and mail fraud.
The charges detail what prosecutors labeled "a code of silence" that Scrushy imposed on the company -- a combination of electronic and personal surveillance, threats, intimidation, and payoffs meant to prevent employees and board members from challenging his control.
Prosecutors allege that while Scrushy was orchestrating a scheme to hide the company's financial troubles and siphon off $278 million for himself, he was asserting publicly -- and under oath to the Securities and Exchange Commission -- that HealthSouth was sound. Yesterday's indictment marks the first time a corporate leader has been criminally charged with lying about a company's financial health under the Sarbanes-Oxley Act, last year's landmark congressional legislation intended to prevent business fraud.
Scrushy parlayed an idea about the growth potential of the outpatient health care industry into an empire that at its height included about 2,000 surgical and rehabilitation facilities and more than 50,000 employees across the country. But when the company could not hit the earnings targets that Wall Street expected, prosecutors say, Scrushy and other managers falsified the books.
Scrushy was released on $10 million bond after turning over his passport and pilot's license. He faces dozens of years in prison and fines of up to $36 million if he is convicted, according to Justice Department officials.
In a letter posted yesterday on his Web site, www.richardmscrushy.com, Scrushy professed his innocence. "I am deeply disappointed to have my innocence questioned and contested; however, I now embrace the opportunity to clear my name," he wrote. "The truth will emerge as I am able to confront my accusers and prove my innocence before my peers and the watchful eyes of our public."
But prosecutors saw things differently. "Instead of telling the public the truth, Scrushy and his accomplices lied," Assistant Attorney General Christopher A. Wray said at a Washington news conference. "They cooked HealthSouth's books and filed false statements with the SEC to cover up their scheme."
The government is seeking to recover the money it says Scrushy obtained through his fraud, and prosecutors said they had secured a restraining order that bars Scrushy from selling any of the assets at issue until the case against him is resolved. Among those assets are a $3.2 million Cessna jet, oceanfront property, diamond jewelry, and additional paintings by Marc Chagall and Joan Miro.
Scrushy is one of a small group of chief executives to face criminal charges in connection with recent financial scandals. Former Rite Aid Corp. chief executive Martin L. Grass pleaded guilty in June to conspiracy to inflate income at the drugstore chain but has not yet been sentenced. Adelphia Communications Corp. founder John J. Rigas will go to trial in Manhattan in February on charges that he presided over a multimillion-dollar accounting fraud at the cable television company. Rigas has denied the charges. Former Tyco International Ltd. chief executive L. Dennis Kozlowski is being tried in a New York state court on criminal fraud charges.