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The Honolulu Advertiser

Posted on: Thursday, November 27, 2003

Ex-HealthSouth CEO told to repay $25 million

By Carrie Johnson
Washington Post

Ousted HealthSouth Corp. CEO Richard Scrushy has been ordered by a Delaware judge to repay $25 million in loans he took from the Alabama-based hospital company in 1999.

In a decision that Scrushy's defense team called "unprecedented," Vice Chancellor Leo E. Strine Jr. ruled that Scrushy, who sought to settle the loans in 2002 with HealthSouth stock that soon proved virtually worthless, should give the company $25.2 million in cash.

"Through conscious wrongdoing, negligent oversight of his subordinates, or innocent failure to catch the misdeeds or inaccuracies of his underlings, Scrushy signed financial statements for HealthSouth that were materially inaccurate," the judge wrote in a 26-page opinion, released Monday.

HealthSouth operates 11 rehabilitation or surgical centers in Hawai'i, with facilities on every major island.

Strine found that Scrushy was "undoubtedly unjustly enriched" when the company accepted shares from him at a price that was artificially inflated based on phony financial statements. Scrushy has been charged with masterminding a $2.7 billion accounting fraud to pump up the company's stock price.

Abbe Lowell, lead defense attorney for Scrushy, vowed yesterday to appeal. Lowell also fired back at federal prosecutors, filing court papers seeking the release of more than $79 million in bank accounts and other Scrushy assets the government has frozen.

"They have liens on his property, they have impounded his vehicles, they have frozen his bank and investment accounts," Lowell said. "They have basically put a lock" on his coffers.

Scrushy was charged last month with 85 counts, including conspiracy, money laundering, securities fraud and mail fraud. At that time, the government sought to freeze about $280 million in allegedly ill-gotten assets belonging to Scrushy. Scrushy has professed his innocence and has blamed the long-running earnings-manipulation scheme on subordinates. To date, 15 former HealthSouth officials have pleaded guilty to conspiracy, tax and related charges.

The plaintiffs argued that Scrushy was responsible for the accuracy of the company's financial statements and that he improperly benefited from the decline in the company's stock price. The plaintiffs did not claim, and the judge did not find, that Scrushy had direct knowledge of the accounting fraud at HealthSouth.

Earlier this week, the bankruptcy examiner seeking to recover assets for Enron Corp. used similar reasoning in a report suggesting that former CEOs Kenneth Lay and Jeffrey Skilling should return about $96 million in loans they repaid with now-valueless company stock.