Hometown Victory for Scrushy

NEW YORK —  Martha Stewart, Bernard J. Ebbers, John Rigas and L. Dennis Kozlowski all were tried in New York for white-collar crimes, and all four high-profile business executives were convicted.

Richard Scrushy, founder of HealthSouth Corp., went before a jury in his hometown of Birmingham, Ala., and walked out of court Tuesday a free man.

The difference in venue and Scrushy’s ability to play to local supporters were the biggest factors in his acquittal on charges of accounting fraud at HealthSouth, according to some legal experts. They said jurors ignored strong evidence mustered by the prosecution in acquitting Scrushy on all 36 counts.

“If he had been placed on trial in any major neutral city, and the jury had people on it who had some business or financial experience, there would have been a pretty quick conviction,” said John Coffee, a securities law professor at Columbia University.

Coffee and other analysts cited the unique circumstances of the Scrushy case in cautioning against viewing his acquittal as a red flag either for the government’s upcoming case against former Enron Corp. executives or for the landmark Sarbanes-Oxley corporate reform law passed after Enron’s collapse.

In Houston, where Enron was based, thousands of people were thrown out of work by the company’s bankruptcy, and shareholders throughout the country lost billions of dollars.

Birmingham-based HealthSouth, in contrast, is “still in business making money,” said Seth Taube, a partner at law firm Baker Botts in New York.

Legal analysts also noted that the charge brought under the Sarbanes-Oxley Act, the first against a major executive since the law took effect, was not the linchpin of the government case.

“It was one out of 36 counts,” Coffee said.

The Sarbanes-Oxley law requires chief executives to personally attest to the accuracy of their financial statements and carries stiff criminal sanctions for those who vouch for false numbers. But because the jury found Scrushy not guilty of the more serious charges of conspiracy and fraud, it would have been surprising for them to convict on the single Sarbanes-Oxley charge, some experts said.

That is, if jurors weren’t convinced that Scrushy had tried to cheat shareholders, it would logically follow that they wouldn’t find that he certified bogus financial reports.

Observers say Scrushy cultivated support from his hometown jury in a variety of ways, including joining an African American church. Seven jurors in the case were black. Scrushy, known locally for his philanthropy, also hosted a Christian local-TV program.

“One of the most important lessons here is: If you’re indicted, know how to cater to your jury pool,” said Charna Sherman, co-chair of the white-collar practice at Squire Sanders & Dempsey.

Sherman, however, said the verdict had to be seen as a blow to Sarbanes-Oxley. Five former HealthSouth chief financial officers testified that Scrushy was involved in fraud, she said, yet the jurors chose to acquit.

“This is a real blow to the intent Congress had in enacting Sarbanes-Oxley and a clear demonstration that it doesn’t have the teeth they intended it to have,” Sherman said.

Sherman said the acquittal could lead lower-level executives to think twice before cooperating in government investigations by raising the prospect that they too may escape conviction.

A common prosecutorial tool is to force second-tier executives to testify against their superiors by waving the prospect of stiff sentences in front of them. That tactic was on display in the WorldCom Inc. fraud case, for example, in which former finance chief Scott D. Sullivan reluctantly became the government’s chief witness against former CEO Bernard J. Ebbers after first refusing to cooperate.

But in Scrushy’s case, executives who agreed to plea bargains ended up as the losers and the top figure was acquitted.

The verdict also turned some recently accepted common wisdom on its head. Ebbers was convicted this year after claiming he did not know about the fraud taking root underneath him, leading some experts to say that CEOs could not convince juries that they were too unsophisticated to detect wrongdoing.

With Scrushy’s acquittal, “the ‘I didn’t know’ defense is still alive and well,” said Mark Zauderer at law firm Piper Rudnick Gray Cary in New York.

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Executive Row

The acquittal of former HealthSouth Chief Executive Richard Scrushy was a rare setback for the government in its crackdown on corporate crime:

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Bernard J. Ebbers

The former WorldCom chief executive was convicted of orchestrating a massive accounting fraud at the company. Sentence: To be determined July 13.

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John and Timothy Rigas

The Adelphia founder and his son Timothy were convicted of looting the cable company and lying about its finances. Sentence: 15 years and 20 years, respectively.

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Frank Quattrone

The former star investment banker for Credit Suisse First Boston was convicted of obstruction of justice. Sentence: 18 months.

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Andrew S. and Lea Fastow

Enron’s former chief financial officer and his wife both pleaded guilty to crimes related to Enron’s 2001 collapse. Sentence: 10 years and one year, respectively.

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Martha Stewart

Convicted of obstruction of justice in connection with an investigation into insider trading. Sentence: Five months in prison and five months under house arrest.

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L. Dennis Kozlowski and Mark Swartz

The former Tyco executives were convicted of stealing tens of millions of dollars from the company. Sentence: To be determined.

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Sources: Associated Press, Times research