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The U.S. Department of Justice unveiled an 85-count indictment Tuesday against Richard M. Scrushy, the former chief executive of HealthSouth Corp., accusing him of adding $2.74 billion dollars of “fictitious income” to the company’s books between 1996 and 2002. The 38-page indictment is the first case in which the government has used the 2002 Sarbanes-Oxley Act against the CEO of a major corporation. Brought in Birmingham, Ala., the case levels federal charges of conspiracy, mail fraud, wire fraud, securities fraud and money laundering against Scrushy. The government is also seeking forfeiture of $279 million worth of property the former CEO allegedly bought with illegally obtained funds. Among the booty the government hopes to claim: a 2001 Cessna Citation aircraft, a $329,000 2000 Rolls-Royce Corniche, a 40-foot racing boat dubbed Monopoly and paintings by Pablo Picasso, Joan Mir�, Marc Chagall and Pierre-Auguste Renoir. The government contends that the fraud at Birmingham, Ala.-based HealthSouth stretched back as far as 1996, with Scrushy as its mastermind. Scrushy allegedly tried to cow HealthSouth employees and board members with “threats” and “intimidation” and by monitoring their e-mail and telephone communications. Scrushy’s lawyer Donald Watkins said his client would plead not guilty. But it is the counts implicating Sarbanes-Oxley that impose among the heaviest prison terms in the case. The act, passed after a spate of corporate scandals, requires CEOs to certify that the filings their companies make with the U.S. Securities and Exchange Commission are correct. Bradford Berenson, a partner at Sidley Austin Brown & Wood in Washington, said those who knowingly violate the certification rule may face as much as 10 years in prison. Willful violators face as much as a 20-year sentence. “While that’s an extra tool in the government’s kit, even prior to SOX, the government was not lacking for tools in this area, as evidenced by the many charges in this indictment,” he said. “If you imagine this indictment without any SOX charges, you probably still, at the end of the day, have the same trial.” In fact, federal securities law gives broad grounds to bring the case to the fraud section of the criminal division of the DOJ and to the U.S. Attorney for the Northern District of Alabama. The complaint, however, suggests that the events leading to the uncovering of the fraud this March were, in part, driven by the passage of SOX. After Congress passed the law in August 2002, HealthSouth accountants told their bosses that they wouldn’t make false entries in the company’s books. A HealthSouth senior officer required to vouch for the company’s SEC filings “balked at signing the report because it contained materially false information,” the indictment charges. In response, prosecutors contend, Scrushy promised to stop inflating net income. 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, prosecutors allege. In that regard, SOX will help the government, said Steven Schatz, a litigation partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif. “The prosecution is using the certifications as evidence of direct participation by the CEO in the financials,” he said. “The CEO is making an affirmation, and I think juries are going to look skeptically on claims that the CEO didn’t know.” Copyright �2003 TDD, LLC. All rights reserved.

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