HealthLawProf Blog

Editor: Katharine Van Tassel
Concordia University School of Law

Friday, July 8, 2005

SEC Going After Scrushy

The SEC civil suit against disgraced former CEO Scrushy had been stayed pending the jury verdict in the criminal case.  As you know, he was found not guilty on all counts just recently.  The federal court in Alabama gave the SEC an order to show cause as to why their civil suit should not be dismissed, and the SEC responded yesterday.  (The following is from the SEC response, cut and pasted from PACER.)

The Securities and Exchange Commission ("Commission" or "SEC") hereby respectfully responds to the Order of June 28, 2005, requiring the parties to show cause why this matter should not be dismissed.

The June 28 Order does not identify the issues of concern to the Court, other than noting the Scrushy acquittal. The Commission shows below that the acquittal has no collateral estoppel effect in this civil matter and that the denial of preliminary relief in 2003 does not justify dismissal on the merits. In short, there is no legal or factual basis for dismissal of the Commission's claims.Nature Of This Action

By statute, the Securities and Exchange Commission has primary responsibility for civil enforcement of the federal securities laws. Effective civil prosecution of financial fraud is essential to ensuring the integrity of America's public corporations.

The reliability of corporate records, reports, and public statements is critical to maintaining investor confidence in the capital markets. Thus, vigorous civil enforcement of the securities laws protects the American financial system.

The Commission carries out its Congressional mandate by, among other things, filing civil enforcement actions against individuals who have violated the federal securities laws. In this action against Richard M. Scrushy ("Scrushy") and HealthSouth Corporation ("HealthSouth"), the Commission alleges that from at least 1999 through mid-2002, Scrushy orchestrated a massive accounting fraud at HealthSouth and engaged in insider trading, aided and abetted HealthSouth's reporting and record-keeping violations, and circumvented HealthSouth's internal accounting systems.  The Commission alleges that Scrushy violated the anti-fraud prohibitions in Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, as well as numerous reporting, record-keeping, and internal control requirements. The Commission asks that the Court enjoin Scrushy from future securities violations, order him to disgorge his ill-gotten gains, impose civil penalties, and bar Scrushy from acting as an officer or director of any publicly-traded company.

Shortly after this action was filed in March 2003, the SEC requested that the Court freeze Scrushy's assets during the pendency of the litigation. At the asset freeze hearing, many of the witnesses (including Scrushy) asserted the Fifth Amendment privilege against self-incrimination and refused to testify. On May 7, 2003, the Court denied the SEC's petition for emergency relief, finding that the limited record failed to justify an asset freeze.  The Court also stayed this case until resolution of criminal charges against Scrushy, noting that "both the SEC and defendant Scrushy would benefit from a stay of this case until all those who pled guilty have been sentenced, so that testimony may be obtained from them . . . rather than repeated insistence . . . on their Fifth Amendment rights."

Current Status

Although Scrushy's criminal trial has gone to verdict, there has been little activity in the SEC's civil case since the stay was entered in May 2003. The only noteworthy development during this period was the entry of final judgment against HealthSouth in June 2005. Pursuant to that judgment, HealthSouth is enjoined from future securities violations and will pay $100 million in civil penalties. Final Judgment As To Defendant HealthSouth Corporation (June 22, 2005).

Before this matter was stayed, the parties conducted limited discovery directed exclusively to the asset freeze issues. There has been no discovery in this case regarding the substantive allegations of the Complaint. Indeed, Scrushy has not yet filed an Answer to the Complaint. Thus, this litigation is at a very early stage.


Neither Scrushy's acquittal nor the Court's 2003 denial of emergency relief provides a basis for dismissal of this civil action. Wherefore, the Commission requests that the Court find that there is no basis for dismissal.

I hope they get this clown - they are seeking some $785 million according to the Boston Globe.

The Atlanta Journal Constitution had an article about his ego - I mean his "philanthropy".

And there is also an article in The Birmingham News about the shareholder suit against Scrushy.  Not surprisingly, the shareholders don't think he should get to keep his bonuses!  [jt]

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