Scrushy Has A Score To Settle

Cleared of fraud charges, HealthSouth's former CEO wants his company back

If this were a made-for-tv movie, it would be called Revenge of the CEO. When former HealthSouth Corp. (HLSH ) Chairman and Chief Executive Richard M. Scrushy emerged from a Birmingham (Ala.) courthouse on June 28, acquitted by a jury on all 36 criminal counts brought by the government over his alleged role in a $2.7 billion accounting fraud, the worst of his legal problems were behind him. Now, if Scrushy has his way, it's payback time.

Cleared of fraud charges, Scrushy is intent on settling the score with HealthSouth, a company he founded in 1984. The board fired him in March, 2003, shortly after the government filed its first complaint against him. Now Scrushy, 52, is girding for a legal battle to reclaim his old post at the Birmingham-based company, his advisers say.

The inevitable and soon-to-be-filed Scrushy v. HealthSouth could be every bit as colorful as the six-month fraud trial proved, with its frequent courthouse prayer sessions and a defense attorney likening government witnesses to rats. Scrushy, according to his attorney, Donald V. Watkins, is readying a fight to regain his CEO post and board role, as well as back pay and legal fees. Says Watkins: "He's entitled to have his job back."

That won't happen easily. HealthSouth today is a far different company than the one Scrushy left, with a new management team and board that has made it clear it wants nothing more to do with the former boss. "Under no circumstances will Mr. Scrushy be offered any position within the company by this management team or by this board of directors," Chairman Robert May said in a statement released after the verdict was read.

What's more, Scrushy still faces civil charges filed by the Securities & Exchange Commission. A ruling in favor of the SEC -- which legal experts believe could happen, given the lower burden of proof required -- could bar Scrushy from serving as an executive or holding a seat on the board of any public company. Nor is Scrushy completely out of the woods on the criminal front: Prosecutors are expected to try to refile the perjury charges that were thrown out in the recent case, although it's unclear whether they will succeed.


Even if scrushy wins the SEC case, that doesn't mean he'll find his way back to HealthSouth. Legal scholars say it's unlikely a judge would impose a CEO on a corporate board against its will. That said, the courts could force HealthSouth to include Scrushy in board meetings again. He has refused to resign his seat, so in April, 2003, HealthSouth created a "special committee" of the board to decide key corporate matters -- a group consisting of every director except Scrushy. Company insiders insist privately that if Scrushy won't resign, they'll map plans to run a new, Scrushy-less slate of directors at a shareholder meeting they hope to hold next spring. "I haven't spoken to a single shareholder who would welcome him back," says Balaji Gandhi, an analyst at Pacific Growth Equities LLC.

HealthSouth's Scrushy problem may not end there. The not-guilty verdict means Scrushy will probably be able to force the company to cover the $25 million in legal fees he racked up during the criminal trial. He will also try to collect pay and perks lost since his firing. If the SEC wins a civil ruling against him, that could be tough; in any case, HealthSouth's board will likely fight his claims by arguing that Scrushy was negligent in allowing a major fraud on his watch.

The prospect of a messy battle could undermine progress made by current CEO Jay Grinney. Completed audits -- the company released restated books for 2000-2003 the day before the verdict -- reveal it lost $1.4 billion during the last four years of Scrushy's tenure. Since he left in 2003, HealthSouth has shut nearly 300 unprofitable rehab and diagnostic centers, enabling it to earn a $109.6 million operating profit in the first quarter of 2005.

Still, analysts say the company faces daunting challenges over the next couple of years. "It's going to be difficult for them to grow revenues in their in-patient rehab business," says Gandhi. "This lawsuit is going to be a distraction." But that doesn't bother Scrushy a bit. zz

By Dean Foust and Brian Grow in Atlanta, with Mike France in New York

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