A Birmingham jury acquitted health care firm founder Richard M. Scrushy of three dozen fraud and money-laundering charges, dealing a powerful blow to government efforts to prosecute executives for financial misdeeds.
The seven-man, five-woman jury rendered a verdict after weeks of sometimes rocky deliberations focused on Scrushy's role in a $2.7 billion accounting fraud at HealthSouth Corp.
The acquittal marks the first major setback for federal prosecutors after a string of recent business fraud convictions and a failure in the first effort to hold a chief executive accountable under a corporate responsibility law passed after blowups at Enron Corp. and WorldCom Inc. Scrushy, 52, was the first chief executive to face charges of violating the 2002 Sarbanes-Oxley Act, which requires top officials to vouch for the accuracy of financial statements.
Outside the courthouse, Scrushy told reporters that he was bolstered by the verdict. "There are a lot of wrongs that need to be made right," he said. "Thank God for this."
Legal experts expressed surprise at the prosecution's loss, in part because the government had gathered 15 guilty pleas from other former HealthSouth executives. All five of the rehabilitation hospital chain's finance chiefs testified against Scrushy in the course of the trial, which began Jan. 5.
"This is an astonishing result," District-based defense lawyer James D. Wareham said. "It will change the way fraud cases are defended in certain regions of the country and will induce the Department of Justice to expand its overuse of the less defendant-friendly Southern District of New York as its forum of choice."
In a rare development for a white-collar fraud case, one insider had made secret audiotapes of Scrushy with a recording device sewn into his necktie. The March 2003 tapes captured Scrushy saying, "I am convinced there are 8,000 companies out there right now that's got [junk] on their balance sheets."
But defense lawyers argued that Scrushy never employed words such as "fraud" or "illegal" -- and that no documents or e-mails produced in the course of the trial directly implicated their client. They called the star witness against Scrushy, former finance chief William T. Owens, a "big rat."
U.S. Attorney Alice H. Martin, who tried the case alongside prosecutors from the Justice Department's Washington-based Fraud Section, said in an interview that she was disappointed with the verdict given the strong evidence.
Prosecutors are appealing the judge's dismissal of perjury and obstruction-of-justice charges. Martin said she would try Scrushy on those charges if they are reinstated by an appeals court. A separate civil case against Scrushy filed by the Securities and Exchange Commission continues, as do scores of lawsuits filed by HealthSouth shareholders.
The unusual trial, which lasted almost six months, featured a judge who described herself as a "neophyte" in criminal law, highly paid defense lawyers who appealed to religion and race to backstop their arguments, and government lawyers who appeared to irritate the judge with their persistent questions.
The jury, composed of seven blacks and five whites, mostly had blue-collar backgrounds and little familiarity with business practices. Deliberations spread over 21 days -- punctuated by repeated interruptions because of illness and vacations. The jurors reported they were deadlocked June 3, but U.S. District Judge Karon O. Bowdre urged them to continue. The judge replaced one older white male juror with a black male alternate June 22 because the older juror had developed health problems. After five more days of talks, the jury handed down its verdict.
"The reason behind our verdict was the lack of substantial evidence and witnesses' credibility," jurors said in a statement released by the court.
Later, eight jurors agreed to speak with reporters at the courthouse without revealing their names. Their names remained under seal until today under judge's orders. "The smoking gun wasn't pointing toward Mr. Scrushy," one male juror told the Associated Press. Another juror said race played no role in their decision.
Though he never testified, Scrushy made his case -- both in and out of court. The defendant, who came from relatively modest beginnings as a physical therapist, starred in a 30-minute television program called "Viewpoint" on weekday mornings. Scrushy and his wife, Leslie, read Bible verses. Scrushy, who is white, preached at predominantly black churches and donated more than $1 million to the Guiding Light Baptist church, which he joined shortly before he was indicted in 2003. He invited black pastors, some wearing clerical collars, to occupy benches in the courtroom in the jury's line of sight.
Defense lawyer Donald V. Watkins, a Birmingham fixture and owner of a local bank, entreated jurors in his closing to "send a message to Washington" and to remember the days of segregated water fountains and unequal treatment for blacks.
Watkins said in an interview yesterday that prosecutors had blundered by trying Scrushy in Alabama. "You never fight a man on his home turf," Watkins said. "Corporate leaders generate so much goodwill for actions they do over time that it's hard for an outsider to come in and persuade them otherwise."
The Scrushy acquittal came after juries in New York convicted former executives at Adelphia Communications Corp., WorldCom Inc. and Tyco International Ltd.
But unlike several chief executives who were convicted, Scrushy never took the witness stand. That left jurors to evaluate only the credibility of former HealthSouth officials who pleaded guilty and testified against him in exchange for more lenient sentences -- a fact the defense hammered repeatedly for the jury.
"Criminal cases that rely on co-conspirators are very difficult to prove unless you can corroborate what the co-conspirators say," said Patrick D. Robbins, a former federal prosecutor in San Francisco. He said that point was driven home when the jury asked to rehear the tapes of Scrushy during its deliberations. "The jury obviously concluded the tape was not incriminating enough."
That could give comfort to former Enron executives Kenneth L. Lay and Jeffrey K. Skilling, who await trial in January on fraud and conspiracy charges. Both men have mounted aggressive public defenses that point the finger at subordinates who pleaded guilty in exchange for lighter sentences.
Legal experts said it was difficult to predict how the Sarbanes-Oxley criminal charge might fare in a different trial and with a different jury -- one that did not soundly reject every aspect of the government's case.
"Sarbanes-Oxley is a good tool for prosecutors," U.S. Attorney Martin said. "I would look for the statute to continue to be used."
Prosecutors claimed that Scrushy pressured subordinates to meet Wall Street earnings targets and inflate profit by nearly $3 billion. The government said he spent more than $200 million in the course of the fraud, buying a Cessna jet, waterfront property on the Gulf Coast, Impressionist paintings and 21-carat diamond jewelry.
HealthSouth agreed to pay $100 million to the Securities and Exchange Commission this month to settle civil charges related to the fraud. The company operates with a new management team, but Scrushy remains a member of the board and one of the largest individual shareholders. HealthSouth's new leaders restated earnings by more than $1 billion Monday to erase some of the fraud off the books.
Robert P. May, the company's chairman, said in a statement that he was "appalled by the multibillion-dollar fraud that took place under Mr. Scrushy's management and the environment under which such fraud could occur." He said Scrushy would not be welcome at HealthSouth under any circumstances.