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Ex-HealthSouth CEO Scrushy loses bid to end SEC ban

Richard Scrushy talks to reporters moments before he enters the Hugo L. Black Federal Courthouse in Birmingham, Alabama, May 18, 2005. REUTE
Richard Scrushy talks to reporters moments before he enters the Hugo L. Black Federal Courthouse in Birmingham, Alabama, May 18, 2005. REUTE

By Jonathan Stempel

(Reuters) - A federal judge rejected former HealthSouth Corp Chief Executive Richard Scrushy's bid to lift a ban on his serving as an officer or director of a public company, which was part of his settlement of U.S. Securities and Exchange Commission charges that he masterminded a $2.6 billion accounting fraud.

Scrushy, 61, who last year finished nearly five years in prison in an unrelated bribery case, has contended that the ban was impeding his ability to return to the healthcare industry, where he built Birmingham, Alabama-based HealthSouth into a large medical rehabilitation company.

However, U.S. District Judge Inge Prytz Johnson in Montgomery, Alabama concluded that Scrushy "benefited greatly from the fraud, whether he knew about it or not," and that there would be a "great likelihood" of future misconduct if the ban were lifted.

"While the court has every confidence in Scrushy that he can once again create an empire out of nothing, the court also remains convinced that the temptation of personal enrichment is too much for him to bear," she wrote in a decision on Tuesday.

The judge added that the ban does not prevent Scrushy from starting a new company or raising capital, but agreed with the SEC that he should not raise that capital in public offerings.

HealthSouth, like the SEC, also opposed lifting the ban, who was released from federal custody in July 2012.

"Life goes on. That's really all I can say. We're disappointed," Scrushy said in a phone interview on Wednesday. "I'm meeting with my attorneys and we're reviewing what our options are."

The SEC and HealthSouth did not immediately respond to requests for comment.

Scrushy has consistently denied doing anything wrong at HealthSouth and blamed subordinates for its problems. His prison term stemmed from a 2006 conviction for paying money to former Alabama Governor Don Siegelman's campaign for a state lottery in exchange for a seat on a state hospital regulatory board.

DUTY TO KNOW

In 2005, an Alabama jury acquitted Scrushy of criminal charges that he directed the accounting fraud at HealthSouth.

Two years later, without admitting wrongdoing, Scrushy resolved the SEC's civil case, which contained the officer and director ban. That accord gave him the right to ask a federal judge to lift the ban after five years.

Then in 2009, an Alabama state judge found Scrushy liable for fraud in a civil, non-jury trial and ordered him to pay HealthSouth $2.88 billion. Most of that sum has not been paid.

Johnson said the issue of whether Scrushy should have known about fraud at HealthSouth weighed "heavily" in her decision.

"He had a duty to ensure the accuracy of profit reports released to Wall Street, he knew of that duty, and he knew the investing public would rely on those reports in making investing decisions," she wrote. "Even if the court accepts defendant Scrushy's suggestion that (others) were the masterminds of the fraud, it was defendant Scrushy's duty to know."

Scrushy has said the 2010 Patient Protection and Affordable Care Act, or Obamacare, allows businesses an opportunity to innovate in healthcare, and he wants to play a role.

"I still think I have a lot to offer a lot of folks," he said on Wednesday.

The case is SEC v. Scrushy, U.S. District Court, Northern District of Alabama, No. 03-00615.

(Reporting by Jonathan Stempel in New York; Editing by Bernard Orr)

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