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December 3, 2005
Fraud Counts Dismissed from SEC Complaint Against Scrushy
U.S. District Judge Inge Johnson dismissed the two securities fraud counts from the SEC's civil complaint (here) against former HealthSouth CEO Richard Scrushy, although she gave the Commission 15 days to refile the charges. The SEC filed its complaint against Scrushy and HealthSouth in March 2003, and alleged violations of Section 17(a) of the 1933 Act for fraud in the issuance of HealthSouth securities, and of Section 10(b) and Rule 10b-5 for fraud in connection with the purchase or sale of the company's securities. Judge Johnson found that the two fraud counts were impermissibly vague, and the complaint does not specify the fraud but only quotes from the two statutory provisions. While the complaint has the broad outlines of the accounting fraud at the company, the Judge apparently wants a more detailed listing of the specific fraud conducted by Scrushy. The company settled the SEC case in June 2005 (Litigation Release here) and agreed to pay a $100 million civil penalty.
Judge Johnson did not dismiss the other counts of the SEC complaint alleging that Scrushy aided and abetted HealthSouth's violations of the reporting, internal controls, and books-and-records provisions of the federal securities laws. These counts do not have the same stigma as a fraud charge, and involve more technical issues that may be amenable to Scrushy's "honest-but-ignorant-CEO" defense. A Reuters story (here) notes that discovery in the civil case will not be complete until November 2006, and the case will not go to trial until February 2007, at the earliest.
Of course, Scrushy will have to face corruption charges filed against him and former Alabama Governor Don Siegelman in the Middle District of Alabama before the SEC case is ready. Scrushy's legal bills are going to continue to pile up, although HealthSouth may be on the hook for at least the securities case under the indemnification provisions of its by-laws and articles of incorporation. (ph)
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