A bad day for the prosecution

Jun 30th 2005
From The Economist Global Agenda

The jury trying Richard Scrushy in connection with financial fraud has found the former HealthSouth boss not guilty. The verdict surprised many observers but can be explained by both the quality of the evidence against him and the way in which the trial was conducted. There are lessons for those who are yet to take part in corporate-fraud trials, including Enron’s former bosses and their prosecutors

“GOD is good” was Richard Scrushy’s initial reaction to the verdict, on Tuesday June 28th, that he was not guilty on 36 charges related to accounting fraud at HealthSouth, a hospital chain he used to run. Prosecutors, on the other hand, were dumbfounded that their case had failed. It was widely regarded as the most solid in a recent slew of fraud trials against top American executives. Moreover, prosecutors in a similar trial, that of Bernie Ebbers, had successfully secured a conviction against the former WorldCom boss in March—and are now pressing the judge to hand down the maximum jail term of 85 years when she sentences Mr Ebbers on July 13th.

Mr Scrushy’s acquittal is the biggest setback so far for those seeking to punish former corporate chieftains for accounting misdeeds that undermined confidence in American business after the bursting of the stockmarket bubble in 2000-01. It is especially embarrassing for prosecutors because it was the first big case to be brought under the provisions of the Sarbanes-Oxley act, which had been rushed through Congress in 2002 in an effort to overhaul corporate governance.
Why, when the Ebbers and Scrushy cases were similar in many respects, did one of them end up in custody while the other walked free? Clearly, the jury in the Ebbers trial felt that the defendant was guilty as charged beyond a reasonable doubt, whereas the Scrushy jurors were not convinced. But the manner in which the cases were conducted, and their location, also played a part.

As charismatic leaders with buckets of southern charm, Mr Scrushy and Mr Ebbers had much in common. HealthSouth’s erstwhile boss had once worked in a petrol station in Alabama, his home state, and cultivated a down-home image during his trial. Mr Ebbers once worked as a nightclub bouncer and, though Canadian-born, famously wore a cowboy hat and boots while running his firm from its base in Mississippi. Both built their respective firms into industry leaders: HealthSouth was America’s biggest provider of outpatient surgery and other health-care services; WorldCom grew to become one of the world’s biggest telecoms firms. But that success was built on an illusion. Fraudulently inflated profits at both companies resulted in accounting scandals to the tune of $2.7 billion at HealthSouth and $11 billion at WorldCom.

Mr Scrushy and Mr Ebbers both protested their innocence. In neither case was any evidence presented that linked the accused to the fraud directly, and both men sought to lay the blame on underlings. In Mr Scrushy’s trial five former HealthSouth chief financial officers appeared as witnesses for the prosecution as part of a plea bargain, alleging that their boss had directed the fraud. Mr Ebbers was faced with evidence from Scott Sullivan, WorldCom’s former finance chief, who testified against his ex-boss also in return for a reduced sentence. The jury in the Ebbers trial accepted Mr Sullivan's testimony, whereas Mr Scrushy’s lawyers managed to cast doubt on the credibility of witnesses with a strong motive for securing a conviction.

In Mr Ebbers’s case the jury refused to accept the “Aw shucks” defence, as it became known. His claim that he knew nothing of accounting, which he left to Mr Sullivan and his like, and had no knowledge of the fraud taking place on his watch, was dismissed out of hand. After the trial one juror said: “How could he be up that high in a company that he started and then say he didn’t know anything?” Mr Scrushy’s jurors took a quite different view. They are reported as saying that they thought he was good at his job and that he couldn’t be expected to spot a fraud that both the board and the auditors had themselves missed.

A variety of explanations are given for the jury’s readiness to accept that Mr Scrushy was in the dark about the shenanigans at HealthSouth. His trial took place in Birmingham, Alabama—not only the state where he grew up but also where HealthSouth is based. He shrewdly employed a team of defence lawyers from a small local firm rather than big shots from a far-away city who might have alienated jurors. His side had the advantage of local knowledge in selecting a jury and putting their case in a folksy, southern style (even addressing the judge as “Ma’am”).

Prosecutors in Mr Ebbers’s trial fought successfully to have his case held in New York rather than Mississippi. His lawyer, Reid Weingarten, one of America’s leading criminal-defence lawyers, believed that WorldCom’s home state would have been a better venue for his trial. In New York, Mr Ebbers maintained a dignified silence and wore a sober suit to court rather than the more flamboyant cowboy gear with which he had become associated.

Mr Scrushy, on the other hand, went on a local charm offensive during his trial. He enhanced his reputation as a deeply religious man through paid-for, half-hour morning-prayer slots on a local TV station. He also joined a local black church and made donations to similar churches in mainly black Birmingham. The jury finally found in his favour after resolving a deadlock in its deliberations that had lasted three weeks. Four days before the verdict, a black replacement had been brought in for an ill white juror, tilting the jury’s racial mix to a black majority. Among those who celebrated the result were local radio stations, which had supported the defendant by repeatedly playing a country-and-western song he had recorded many years ago.

The prosecution in Mr Scrushy’s trial may also have erred in bringing 36 charges against him, including conspiracy, fraud and money laundering. Some critics have characterised the approach as flinging mud to see what sticks. It did not help that the jury in this trial, as in so many other complicated fraud cases, was baffled by much of the detail and the lack of any “smoking gun”.

By contrast, Mr Ebbers was charged with just nine counts in Manhattan. And perhaps more importantly, he chose to take the stand in his own defence and spent two days under the watchful eyes of the jurors, who said after the trial that they had not found his testimony credible. Mr Scrushy chose to exercise his right to say nothing.

Despite the verdict, Mr Scrushy’s legal problems are not over. Aggrieved investors intend to pursue civil actions against him. And his intention to return to his old job at HealthSouth, or at least force the company to pay his legal expenses, may also involve court action. HealthSouth has said that it will not allow him to return.

Kenneth Lay and Jeff Skilling, respectively the former chairman and former chief executive of Enron, are both set to go on trial early next year. Their prosecutors will have been encouraged by a number of successes securing convictions of corporate wrongdoers in recent months: not only Mr Ebbers but John and Timothy Rigas of Adelphia and Dennis Kozlowski and Mark Swartz of Tyco have been found guilty of various corporate misdeeds and face long jail terms. But the Scrushy verdict should give Enron’s prosecution team pause for thought. They might now want to think long and hard about both presenting a case that relies heavily on the evidence of former employees—who, in the eyes of jurors, may be less credible than the bosses they are helping to incriminate—and where the trial takes place.

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