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SEC Explains Why Scrushy Case Should Not Be Dismissed

The SEC has submitted its response to the order by the U.S. District Court for the Northern District of Alabama, Southern Division, to show cause why its civil action against Richard Scrushy, the former CEO of HealthSouth Corp., should not be dismissed (Civil Action No. CV-03-J-0615-S, July 7, 2005). The order came as a result of Scrushy's acquittal in the government's criminal trial. The SEC's case had been stayed while awaiting the resolution of the criminal charges against Scrushy. The SEC advised that neither Scrushy's acquittal nor the court's denial in 2003 of the SEC's request for emergency relief to freeze Scrushy's assets provides a basis for the dismissal of its civil action.

The SEC alleges that Scrushy, between 1999 and mid-2002, orchestrated a massive accounting fraud at HealthSouth during which time he engaged in insider trading, aided and abetted HealthSouth's reporting and recordkeeping violations, and circumvented the company's internal accounting systems. The SEC is seeking to enjoin Scrushy from future securities violations, disgorge his ill-gotten gains and bar him from acting as an officer or director of any publicly-traded company.

The SEC noted that since the court denied the SEC's petition for emergency relief and stayed the case in May 2003, there has been little action in its case other than the entry of a final judgment against HealthSouth on June 22, 2005. In the judgment, HealthSouth was enjoined from future securities violations and ordered to pay $100 million in civil penalties. The SEC advised that there has been no discovery in its case regarding the substantive allegations of the complaint and that Scrushy has not yet filed an answer to the complaint. The litigation is at a very early stage, according to the SEC.

In its civil proceeding, the SEC need only prove the factual elements of its case by a preponderance of the evidence, unlike the criminal case in which the essential facts had to be proved beyond a reasonable doubt. The SEC noted that Scrushy's acquittal merely established that the criminal prosecutors were unable to prove all of the factual elements of the alleged crime beyond a reasonable doubt, but the acquittal in a criminal action does not bar a civil suit based on the same facts.

The SEC explained that its case raises issues that are particular to its distinct statutory mandate, including whether Scrushy departed so far from the ordinary standard of care required of a senior corporate officer that he is civilly liable for fraud. The SEC's proceeding will also address whether Scrushy should be barred from serving as an officer or director, whether he should disgorge the "vast sums" he gained as a result of the fraud and whether to impose a monetary penalty.

The SEC maintains that HealthSouth and a number of its employees engaged in one of the largest securities frauds in U.S. history and that they occurred while Scrushy was CEO. The civil case is the appropriate setting for deciding his civil liability and any necessary remedies, according to the SEC.

Scrushy now has 10 days to respond to the show cause order. The SEC will have 10 days to reply after the filing of Scrushy's opposition brief.