Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 23, 2007

Scrushy Settles SEC Actions by Paying $81 Million

The Securities and Exchange Commission announced today that the United States District Court for the Northern District of Alabama has entered a Final Judgment against defendant Richard M. Scrushy that permanently bars Scrushy from serving as an officer or director of a public company, permanently enjoins Scrushy from committing future violations of the antifraud and other provisions of the federal securities laws, and requires Scrushy to pay $81 million in disgorgement and civil penalties.

The Commission's complaint in this action charges Scrushy with directing a $2.6 billion financial fraud at the HealthSouth Corporation during the years 1996 through 2002. Scrushy was one of HealthSouth's founders, and was chairman of its Board of Directors and its chief executive officer during the relevant period of the fraud.

The Complaint alleges that, at Scrushy's direction, HealthSouth's overstated its revenue by more than $2.6 billion from the second quarter of 1996 through the third quarter of 2002. This overstatement led directly to quarterly and annual overstatements of net income and retained earnings. The Commission's complaint charges that, by the end of 2002, HealthSouth was claiming to have over $1.5 billion in accumulated retained earnings, when in fact the Company had operated at a significant loss over its entire corporate history. The HealthSouth fraud resulted in one of the largest accounting restatements in American corporate history.

The Final Judgment orders Scrushy to pay $81,000,000, comprised of $3,500,000 in civil penalties and $77,500,000 in disgorgement, with the disgorgement amount subject to an offset for any amounts paid in judgments or settlements in certain derivative, corporate, and class action lawsuits seeking recovery of the same money as the Commission. The Final Judgment provides that, upon a motion to the Court, the civil penalties paid by Scrushy may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, in this case by asking the Court to add these sums to the Fair Fund already established as a result of the Company's settlement. The Final Judgment permanently prohibits Scrushy from acting as an officer or director of a public company, and Scrushy has consented to refrain from seeking modification or removal of this prohibition for at least five years from the entry of the Final Judgment. The Final Judgment permanently restrains and enjoins Scrushy from violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder.

Scrushy consented to the entry of the Final Judgment without admitting or denying any of the allegations in the Commission's complaint. In his Consent to this settlement, which is incorporated into the Final Judgment, Scrushy has agreed to refrain from seeking indemnification or reimbursement from any third-party for any part of the $81 million required by the Final Judgment, whether that sum is paid directly to the Commission or paid to satisfy judgments or settlements in the lawsuits for which Scrushy claims an offset against the $77.5 million disgorgement amount.

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