With God on his side

Face value

Jun 30th 2005
From The Economist print edition

Is Richard Scrushy's acquittal on 36 fraud charges as miraculous as it seems?

“GOD is good,” declared Richard Scrushy on June 28th, after a jury acquitted him on all of the 36 charges he faced in connection with a huge accounting fraud at HealthSouth, an outpatient-services provider he once ran. Mr Scrushy's words surely came from the heart: as the trial began, most pundits thought he would need a miracle to end it a free man. The evidence against him seemed at least as strong as that in some of the other recent trials of corporate bosses, which have convicted (among others) Bernie Ebbers of WorldCom, Dennis Kozlowski of Tyco and John Rigas of Adelphia. Those ready to testify against Mr Scrushy included no less than five former HealthSouth chief financial officers, who had already pleaded guilty to inflating profits in 1996-2002 by what prosecutors said was $2.7 billion. (The firm's restated results, released on June 27th, put the total mis-statement at $3.9 billion.) Moreover, Mr Scrushy was the first chief executive to stand trial for allegedly breaching Sarbanes-Oxley, a tough new law passed after the collapse of Enron and WorldCom to ensure that errant bosses are brought to justice.

It is tempting—especially if you live in some far off metropolis—to assume that Mr Scrushy instead experienced a traditional sort of Alabama justice. Mr Scrushy's roots go deep in Birmingham, where HealthSouth is based and his trial took place. The judge once rode horses at his stable (prosecutors declined her offer to stand down for that reason). His lawyers painted Mr Scrushy as a humble man from nearby Selma, targeted unfairly by the federal government.
After the trial, Mr Scrushy joined in the local sport of Washington-bashing, saying, “we've got to have compassion, folks, because you don't know who's going to be attacked next.” In closing arguments Donald Watkins, one of Mr Scrushy's lawyers, compared his client's plight to what he himself faced growing up black under segregation.

Mr Scrushy had used his large salary—including an $11.8m bonus and 1m options in 2002—to finance side businesses that included a local radio show he co-hosted with an actor from “The Wonder Years”, a 1980s TV series. He now co-hosts, with his (third) wife, a Christian TV show. While on trial he preached in local churches, in what some observers consider a blatant attempt to influence the jury via congregation members. (Future defendants tempted to play the religion card should note that it is not always successful. A New York jury was not won round by the frequent church-going of Mr Ebbers. Still, Kenneth Lay, the ex-boss of Enron—due to be tried next year, probably in his home town, Houston, Texas—may now be more tempted to call as a character witness the Reverend Jesse Jackson. After Enron's collapse, he likened Mr Lay to that innocent biblical victim, Job.)

Speaking after the trial, jurors clearly resented suggestions that Mr Scrushy's religion, local roots or supporters in the courtroom influenced their decision. And while it is never really possible to know why a jury reaches a particular decision, even given the post-trial interviews allowed in America, there were certainly other reasons with more legal merit than hometown bias that may have led to Mr Scrushy's acquittal.

One is the lack of hard evidence, such as documents or e-mails, linking Mr Scrushy to the so-called “family meetings” at which finance and accounting executives cooked the books. A secretly taped “confession” secured from Mr Scrushy via a device hidden in the tie of one former chief financial officer, William Owens, was apparently too ambiguous for the jury.

Instead, prosecutors relied on testimony from Mr Scrushy's subordinates, who blamed their former boss. But Mr Scrushy's lawyers created sufficient doubt about the credibility of these witnesses in the minds of jurors. In this, they were helped, it seems, by some glaring personal failings—Mr Owens had not filed tax returns for nine years—and by the fact that many key witnesses testified under plea bargains that got them lighter sentences. Thus, defence lawyers could point out that these witnesses had a strong incentive to blame Mr Scrushy—regardless of the truth. That is a clear downside to the government's strategy in its recent corporate-crime campaign of pursuing plea bargains first from junior executives—who are then “flipped” into testifying against their bosses, and so on, all the way to the top. Lawyers for Mr Ebbers pointed out this plea-bargain paradox in the hope of undermining the key prosecution witness, his ex-chief financial officer, Scott Sullivan—causing at least one juror to hesitate before finally deciding to convict. Mr Lay and Jeffrey Skilling, another ex-boss of Enron, are expected to deploy similar arguments against former chief financial officer Andrew Fastow, who has accepted a ten-year jail term in a plea bargain.

Jurors may also have been unusually inclined to give the benefit of any doubt to Mr Scrushy because of the long jail term that probably awaited him, thanks to a significant recent toughening of sentencing guidelines. This week, the government sought an 85-year jail term for Mr Ebbers. By some estimates, Mr Scrushy could have got 300 years, albeit many to be served concurrently.

A scrushing blow?

One acquittal is hardly fatal to the government's strategy of seeking high-profile criminal convictions for bosses of scandal-hit firms. But it does highlight the fact that criminal trials are something of a lottery. Mr Scrushy's fate will add weight to the argument of some who claim that prosecutors have overreached, and that using civil rather than criminal procedures would yield more reliable results, and at far less cost to taxpayers.

Mr Scrushy will now keep most of his estimated $300m fortune. But he still faces several civil lawsuits, and federal prosecutors are considering their next moves. Mr Scrushy meanwhile hopes to get back his old job at the firm where, with 3.8m shares, he remains stubbornly on the board. But judging by the statements of the new management, that really will take a miracle.

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