Saturday, July 23, 2005

Scrushy Seeks Dismissal of SEC Securities Fraud Suit

Former HealthSouth CEO Richard Scrushy filed a brief in response to U.S. District Judge Inge Johnson's order to show cause seeking dismissal of the SEC's securities fraud and accounting suit.  Scrushy argues that the government has not offered any "credible" evidence that he knew about the fraud at the company, and because the Commission's evidence will be the same as that presented in the criminal trial that resulted in an acquittal, the court should dismiss the SEC case.  The usual analysis is that, because the SEC only seeks a civil remedy and not a criminal punishment, the lower burden of proof means that an acquittal in a prosecution has no effect on the enforcement action.  Nevertheless, nothing about this case has been usual, and the district court may dismiss some or all the counts in the SEC complaint (here). 

If the SEC survives the show cause hearing, then the next step will be the deposition of Scrushy, which promises to be an interesting proceeding.  The Department of Justice's decision not to seek appellate review of the dismissed perjury charges means that Scrushy would not be able to postpone the deposition because of the pending criminal case, and he no long has a Fifth Amendment problem because he was acquitted of the charges.

Scrushy posted a letter on July 15 to his personal website (here) that, among other things, discusses the government's continued pursuit of him:

However, what pains me the most, is how our United States government conducted this investigation in a way that maximized the damage done to HealthSouth and to its shareholders. Some have called the government’s tactics a “shock-and-awe” campaign—but it was the shareholders who were shocked and awed. Had the government conducted their investigation properly, instead of prioritizing their media blitz, I believe HealthSouth’s stock would never have been delisted, and the stock price drop would have been minimal.

Has there been a more overworked phrase in the last couple years than "shock and awe"?

The oral argument at the show cause hearing (assuming there is one) will certainly be a hot ticket.  A Washington Post article (here) discusses Scrushy's brief in the SEC case and also mentions that he is pursuing repayment from the company of his $20+ million legal expenses in the criminal action.  Under Delaware law, Scrushy has a good argument for payment of the fees, but don't look for that litigation to be any less contentious than the criminal or SEC cases. (ph)

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Civil Enforcement, HealthSouth, Securities | Permalink

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