The Securities and Exchange Commission yesterday urged a federal judge not to dismiss a civil fraud case against former health care executive Richard M. Scrushy, who was acquitted last week of three dozen criminal charges.
Agency lawyers acted in response to an order from U.S. District Judge Inge P. Johnson, who demanded within hours of the acquittal that they "show cause" as to why the civil case should survive.
"Effective civil prosecution of financial fraud is essential to ensuring the integrity of America's public corporations," SEC lawyers wrote in a seven-page brief.
Scrushy is accused of engineering a $2.7 billion fraud at HealthSouth Corp. Five former chief financial officers for the Birmingham rehabilitation chain pleaded guilty to taking part in the earnings manipulation. They testified against Scrushy at his nearly six-month criminal trial, which ended last week after jurors said the government had not proved its case beyond a reasonable doubt. In explaining their verdict, the jurors said the cooperating witnesses lacked credibility.
Securities regulators face a far lower burden of proof than criminal prosecutors -- needing to convince a judge or jury of only a defendant's guilt based on a "preponderance of the evidence." The civil case is still in an early stage. The two sides have not yet exchanged documents and other materials in the discovery process, lawyers said.
Moreover, according to SEC court papers, the agency is entitled to pursue its case on the basis of "whether Scrushy departed so far from the ordinary standard of care demanded of a senior corporate officer that he is civilly liable for fraud."
Regulators are seeking more than $786 million in penalties and restitution. They also want an order that would bar Scrushy from ever again serving as an officer or director of a public company. Scrushy said last week that he was considering returning to HealthSouth, an idea that was promptly rejected by the company's new managers.
Charles Russell, a spokesman for Scrushy, said: "We will prepare an answer to the SEC's filing when we have had a chance to review it. We will handle legal issues in a legal forum and not attempt to preempt the judge by making any further comments at this time."