June 29, 2005
Back to Court for Scrushy?
On the TV lawyer shows, once the jury announces a not guilty verdict -- the outcome of both Matlock episodes I've watched -- everyone leave the courtroom and nothing further happens to the defendant. Not so, most likely, with Richard Scrushy. As discussed in our earlier posts (here and here) and in news stories (see AP story here), the government appealed the dismissal of three perjury charges and an obstruction of justice charge during trial because of misconduct by the prosecutors and the SEC in connection with taking Scrushy's deposition in the SEC investigation. Because the dismissal was not based on the sufficiency of the evidence, the government has the right to appeal and, if the Eleventh Circuit reverses U.S. District Judge Karon Bowdre's order, the government can retry Scrushy, as it has indicated it will. That may be a bad tactical decision, as Ellen has already noted, and the odds of winning a retrial are not very high, given that the case will be in Birmingham.
There's another issue in that Scrushy's lawyers will likely argue regarding the perjury/obstruction counts aside from the merit of Judge Bowdre's decision, and that is whether the jury's not guilty verdict on the 36 counts constitutes collateral estoppel on the perjury charges. Under the double jeopardy clause, the Supreme Court has recognized that the government may be collaterally estopped from prosecuting a different crime if the jury has already decided the underlying factual basis in favor of the defendant in a prior proceeding. The main case in this area is Ashe v. Swenson, which involved a second prosecution for robbing a participant in a poker game after the defendant was acquitted of robbing another participant in the same game. Scrushy will argue that the perjury counts (indictment here), which allege that he knew the company's financial statements were false when he testified as to their veracity, were effectively decided by the jury when it accepted his defense that he was misled by the company's CFOs and had no knowledge of improper accounting or revenue recognition. Collateral estoppel is a very difficult argument to win, but in this case, at least with regard to the perjury charges, Scrushy has a good claim that the not guilty verdict means that he did not know of the fraud, and therefore could not have intended to testify falsely.
Although most of the criminal case is over, and perhaps all of it, the SEC plans to pursue its civil enforcement action alleging securities fraud related to both the false financial statements and insider trading related to Scrushy's sales of HealthSouth stock. The judge in that case has scheduled a hearing in July to consider whether to dismiss the case, and the Commission will argue that the acquittal has no effect on the civil case because of the different burdens of proof. The standard understanding in this area is that the not guilty verdict does not mean the person is innocent, only that the government did not prove the case beyond a reasonable doubt, so the civil case with its lower "preponderance of the evidence" standard can go forward. This case, however, has been far from standard, beginning with the asset freeze hearing in 2004, so it is difficult to predict what will happen. If the SEC case does move forward, the Commission will be able to depose Scrushy, and call him to testify at trial, unlike in the criminal case. Fireworks are sure to ensue from that confrontation.
The media reports also hint that Scrushy may seek to regain his job as CEO, and file a wrongful termination suit against the company. This will put him in a far different, and potentially weaker, position. As a defendant, he can rely on the burden of proof, while as the plaintiff he will have to establish that his termination was improper. Given that his defense in the criminal case was that he was misled for years by CFOs and others about the company's false accounting, that is hardly an endorsement of his conduct as CEO of the company. What worked as a criminal defense may undermine his claim that he was removed from office wrongfully when all these problems happened on his watch and, perhaps, with a measure of his participation. Once again, he will have to testify in a wrongful termination suit, and be subject to extensive cross-examination.
Finally, there can be plenty of litigation involving corporate issues if the board seeks to have the shareholders remove him, or if Scrushy mounts a hostile proxy to get himself and others on the board as a first step toward restoring himself to office. If the SEC were to win its securities fraud suit, he would be prohibited from serving as an officer and director for a period of at least five years, and HealthSouth's current management has been quite cooperative in the SEC's case. That could change if Scrushy retakes power, and he may be thinking that the best defense here is a good offense (hey, this is football country!).
Unlike a Matlock episode, this one will be in court for a while yet. (ph)
Update (6/29): Not to belabor the point, but Scrushy's employment agreement is available at Findlaw (here), and contains the following provisions for termination:
(c) Termination for Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the Executive shall be considered to be terminated for "Cause" only if (i) the Executive is found, by a non-appealable order of a court or competent jurisdiction, to be guilty of a felony under the laws of the United States or any state thereof or (ii) the Executive is found, by a non-appealable order of a court of competent jurisdiction, to have committed a fraud, which has a material adverse effect on the Company. However, in no event shall the Executive's employment be considered to have been terminated for "Cause" unless and until the Executive receives a copy of a resolution duly adopted by the affirmative vote of a majority of the Board at a meeting called and held for such purpose (after reasonable written notice is provided to the Executive setting forth in reasonable detail the facts and circumstances claimed to provide a basis of termination for Cause and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that the Executive is guilty of acts or omissions constituting Cause.
(d) Termination other than for Cause. The Board shall have the right to terminate the Executive's employment hereunder for any reason at any time, including for any reason that does not constitute Cause, subject to the consequences of such termination as set forth in this Agreement.
For a non-cause termination, Scrushy receives a number of benefits as set forth in the agreement. Yet one more cost to the company, most likely, along with the attorney's fees from the defense. (ph)
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