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In the seemingly endless blur of disgraced corporate executives, Richard Scrushy can lay claim to one distinction. In November the ex-CEO of HealthSouth Corp. became the first chief executive of a major company to be charged with violations of the Sarbanes-Oxley Act. The 38-page indictment, brought by the U.S. Department of Justice in HealthSouth’s hometown of Birmingham, accuses Scrushy of adding $2.74 billion of “fictitious income” to the company’s books between 1996 and 2002. Prosecutors also claim that the ex�CEO tried to cow his employees and board members with “threats” and “intimidation” and by monitoring their e-mail and phone communications. Scrushy’s lawyer, Donald Watkins, says his client will plead not guilty. The indictment’s 85 counts level various charges of conspiracy, mail fraud, wire fraud, securities fraud, and money laundering against Scrushy. But the three counts alleging Sarbanes-Oxley violations carry the longest possible prison terms. The act, passed after a spate of corporate scandals, requires CEOs to certify that the filings their companies make with the Securities and Exchange Commission are correct. According to Bradford Berenson, a partner in the Washington, D.C., office of Sidley Austin Brown & Wood, those who “knowingly” violate the certification rule may face as much as ten years in prison; “willful” violators could get up to 20. But while Berenson calls Sarbanes-Oxley “an extra tool in the government’s kit,” he adds, “Even prior to SOX, the government was not lacking for tools in this area, as evidenced by the many charges in this indictment.” Scrushy’s prosecutors might have been able to bring the same case without Sarbanes-Oxley, as Berenson maintains. But the indictment suggests that the law played a key role in exposing the HealthSouth CEO’s alleged fraud. Prosecutors say that after Congress passed Sarbanes-Oxley in the summer of 2002, HealthSouth accountants told their bosses that they wouldn’t make false entries in the company’s books. And in August a HealthSouth senior officer required to approve that month’s 10-Q filing with the SEC “balked at signing the report because it contained materially false information,” the indictment states. In response, Scrushy promised to stop inflating net income, prosecutors say. Instead, he blamed HealthSouth’s reduced earnings on changes in Medicare policy. He also explored a leveraged buyout of all or part of HealthSouth in an effort to reduce public scrutiny. But the LBO never occurred, and Scrushy didn’t stop cooking the books, according to the indictment. In that regard, Sarbanes-Oxley will definitely help the government, says Steven Schatz, a litigation partner at Wilson Sonsini Goodrich & Rosati. “The prosecution is using the certifications as evidence of direct participation by the CEO in the financials,” he says. “The CEO [made] an affirmation, and I think juries are going to look skeptically on claims that the CEO didn’t know.”

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