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Healthsouth Scandal

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Introduction

Richard Martin Scrushy was born in 1952 in Selma Alabama. Richard is the son to Gerald and Gerri Scrushy. Gerald was a cash register salesman and Gerri was a registered nurse (Watson, 2005, p. 2). Richard worked until he became successful, wealthy, and powerful. He was able to obtain the American dream of family, security and wealth. In 2003, an accounting scandal threatened to change his career, his wealth, and his freedom. The Securities and Exchange Commission (SEC) filed a civil law suit against HealthSouth Corporation and Richard M. Scrushy. The SEC charged that the company inflated their books by $1.9 billion since 1999 (SEC, 2003). The filing of these charges had a multiple impact on the stakeholders. The ethical dilemmas that caused the rise and fall of Richard M. Scrushy will be reviewed.

Scrushy’s Beginnings Scrushy began his humble beginnings in Alabama. Watson (2003), biography of Scrushy reports he dropped out of high school and worked as a gas station attendant and later a bricklayer. He eventually returned back to school and earned his high school diploma. Later Scrushy enrolled at Jefferson State Community College in Birmingham. He did a year at Jefferson State and a year of clinical training at the University of Alabama at Birmingham (UAB). Scrushy graduated in 1974 as a certified respiratory therapist (Watson, 2003, p. 1).
Once Scrushy graduated with the certification of a respiratory therapist, he began climbing the ladder. His accomplishments were as follows: * 1974 - Taught at University of Alabama Birmingham. * 1979 -1984 Vice President at LifeMark HealthCare Firm. * 1984-2003 Founded HealthSouth in Little Rock Alabama. The company began with the four colleagues from Lifemark and $50,000. Scrushy also became CEO and Chairman of HealthSouth. * 1985- Scrushy moved HealthSouth to Birmingham. * 1986- SouthHealth went Public (Cherry, Brenda & Neering, 2003, p. 76). Dr. Phillips a cardiologist who testified at the congressional hearings stated there was another company, Amcare, in 1983 before HealthSouth. Scrushy proposed that Dr. Phillips merge his practice facility with Amcare to form a Comprehensive Outpatient Rehabilitation Facility (CORF). Dr. Phillips testified, “The unique concept of a CORF was to combine outpatient surgery and rehabilitation facilities into one stand-alone medical complex in order to ease patient burden and expense, and ultimately provide for more successful patient recoveries,” (cited by Jennings, 2012, p. 189). The concept was appealing and cost effective to the physician. He would be used to persuade other medical professionals to buy into the concept. Dr. Phillips testified he felt that this concept was and still is very comprehensive. He did not know of the fraudulent accounting and believes under the new directors the company can continue to succeed.
Executives at HealthSouth

According to Jennings (2012), the workers consider Scrushy as a tyrant and micromanager. He had Monday morning numbers meetings which were referred to as the “Monday morning beatings,” (p. 184). This meeting was an opportunity for Scrushy to flex his authority. He questioned the staff about cellphone bills, hospital performance and tactical issues. He often said to the team of executives, “That was the stupidest thing I ever heard,” (Heylar, Cherry, and Neering, 2003, p. 76).
Heylar, Cherry, and Neering (2003) continue to report, the company’s team motto was “Pulling the Wagon Together.” Scrushy had printed up posters, tee shirts and a sculpture of eight stick figures pulling the wagon. Outside of his office in Birmingham, Scrushy had the replica of the wagon. Aaron Beam, co-founder and CFO felt, “the team was really pulling the wagon for Richard and in the end, he was leading all of us to a sure disaster,” (cited by Heylar, Cherry, Neering, 2003, p. 76).
Beam’s sentiments regarding Richard’s self-centered attitude was shared by many. Scrushy’s extravagant living earned him the name Birmingham’s Donald Trump, or King Richard. Peter Emch, a health-care analyst with Credit Suisse First Boston told Chief Executive (2001), "He's one of the most visible and flamboyant leaders in health care." In Birmingham he had buildings and streets named after him. He built a moment to himself behind the company. During the trail his assets were listed by the SEC as 34 cars, a yacht, captain, maids, homes, helicopters, private jets, vacation homes and other luxury items. King Richard did not appear to be a popular King. Many of his executive’s testimonies painted him as a tyrant. He behaved as a man who did not get what he wanted during his childhood, so he created a lifestyle where he could reward himself at all times. Nevertheless, his executives remained loyal subjects within the company. Why did these executives endure the harsh treatment and engage in fraudulent behavior? The executives maintained their positions and unethical and illegal behavior for the following reasons: * They were in agreement with the cost effective treatment of clinics vs. traditional hospitals. * HealthSouth pay scale was higher than other companies. * Helyar, Cherry and Neering (2003), researched that the staff could get stock, and shares became quite valuable as the company's stock rose, at a 31% annual clip from 1987 to 1997. * The fourth and final reason would be all the star studded athletes coming into the sports-medicine clinic. Michael Jordan, Bo Jackson, Kobe Bryant, Herschel Walker, Roger Clemens, Scottie Pippins, and other athletes would come in for treatment (Jennings, 2012, p.183).
It appears that these executives discarded their own personal ethics to enjoy, money and the privilege of being with famous celebrities. During the litigation and testimony there were only a few individuals that dared to go against the group ethics and maintain their own individual ethics. As cited by Jennings (2012), Denise Henze and Teresa Sanders, both accountants, did not enjoy working for Scrushy and their fiduciary duties did not allow them to falsify documents. Scrushy was not compassionate when he was doubled crossed. William A. Massey Jr., was Scrushy’s personal CFO. According to Heylar and et.al (2003) when Scrushy realized that Massey was having an affair and stealing from him, he became outraged. The mistress’s name was Hope Launius, who worked for Uppseedaisees and was Leslie Scrushy’s close friend (p. 411). Massey, Scrushy and Launius met when the details were revealed. Nevertheless, the thought of being ousted by Scrushy to his wife and co-workers caused Massey to commit suicide on July 30, 2002 in Birmingham. Scrushy tried to file a criminal case against a dead man for embezzlement. Was the King the only one who could behave badly? Apparently the rule was, the king could steal but no one else could mirror his behavior.

Sudden Attack of Morals Salky and Roseman (2005) reported that the chief financial officer of HealthSouth, Weston Smith, had a life changing event in August 2002. Smith had signed several fraudulent documents in the past, but since the Enron scandal and the SOX Act of 2002 he was frightened to sign the second quarter annual financial report, a form called 10-Q. (Taylor, 2005, p. 411). Under the SOX Act, white collar crime penalty came with a possible ten year imprisonment. Therefore, officers who willingly or recklessly certified false statements could face imprisonment. Smith should have followed his initial judgment in the first quarter to resign and not sign the form. However, Scrushy personally spoke with him and convinced him that the company was turning over a new leaf and he would be the new CFO and numbers would not be inflated. Therefore, he signed the document and therefore became liable for his actions (Taylor, 2005, p. 412).
The Stakeholders Stakeholders were affected by the companies’ actions and detrimental policies to falsify the books. Employees, government, shareholders, and patients were directly affected. During the congressional hearings in the House of Representatives, the Honorable James C. Green, Chairman made the following statements.
“Mr. Scrushy stands accused of masterminding a scheme to boost the company's income over a period of 7 years by $2.7 billion. $2.7 billion; that is an incredible amount of money. How many retirees invested their savings with HealthSouth relying on figures that told them the Company was in good financial health? How many young families just starting out decided to invest their hard earned dollars in HealthSouth relying on the public statements of CEO Richard Scrushy? Over a period of 7 years Mr. Scrushy received about $267 million in compensation from HealthSouth, including $53 million in bonuses alone.” Scrushy’s lack of morals and ethics may have caused investors their life savings. As stated above by the Chairman of the House of Representatives, Scrushy deceived innocent people who believed the reports his company had inflated. The reports indicated that the company was a solid investment and doing extremely well. Therefore, individuals placed their monies within the companies. The damage was so great that the stockholders filed a civil lawsuit seeking damages of $2.6 billion from Scrushy.

Scrushy’s Legal Outcome and Punishments In May of 2005, the federal grand jury indicts former Alabama Gov. Siegelman and Scrushy on bribery charges that Scrushy bought a seat on a state health board by arranging $500,000 in donations to Siegelman's 1999 campaign to establish a state lottery. On June 29, 2006 the Federal jury finds Scrushy guilty of bribery, conspiracy and mail fraud.
On June 28, 2005, Scrushy was acquitted in federal trial of fraud and violations of the Sarbanes-Oxley laws. To everyone’s amazement, Scrushy was acquitted of 36 counts of criminal charges regarding the accounting fraud following a jury trial in 2005. His lawyer, Donald Watkins, a black attorney from Birmingham used the media and his race card to speak to the 7 of 12 Black jurors (Hayler, 2005, p. 6). Watkins saved Scrushy with his tactics. The trail was on media every day. Church members would come and sit in the courtroom to show support. Scrushy had joined a black church and had religious television shows. It is disgraceful that such tactics were used to win a case. The black attorney used race and religion to help a client that he knew was guilty. It is his job to give the best defense for his client, but at what cost? After Scrushy's acquittal in 2005, Henderson admitted that Scrushy had given him money for his church and for helping build support for Scrushy in Birmingham's black community before that first trial. Scrushy and his supporters denied the claims (Faulk, 2011).
Scrushy however had other lawsuits and criminal charges pending. Barr (2005) reported Scrushy faced a $2.88 billion lawsuit brought by HealthSouth shareholders for inflating the company's earnings between 1996 and 2003. In the civil trial in Birmingham, Ala., Scrushy vigorously argued that he neither played a role in nor was aware of the financial deception. Scrushy’s lawyer, Watkins indicated that his client was innocent. Watkins felt that his client was not aware of the accounting fraud at HealthSouth, and when it was brought to his attention he could not correct it because he was removed from his position as CEO. It is very hard to believe a CEO would not know what is happening within his accounting department. It was his responsibility to ensure the reporting was accurate. Jefferson County (Ala.) Circuit Court Judge Allwin Horn’s statement validates my assessment. "Scrushy was the CEO of the fraud," Judge Horn’s comments were, "This court finds it inherently incredible that a CEO could fail to know of or discover a fraud of this magnitude over almost seven years," (as cited by Blesch, 2009, p. 16). In June 2009, Alabama court found Scrushy guilty of fraud and he breached his fiduciary duties. (Shareholder’ Litigation, 2011, p. 162). The court also rescinded three employment contracts for engaging in fraud and “consciously disregarding his responsibilities to HealthSouth,” (Shareholder’s Litigation, 2011, p. 163). He was required to pay back the monies to HealthSouth.
In 2011 the 11th Circuit Court of Appeals throws out two of the honest services fraud charges against Scrushy causing, in January 2012, the sentence to be reduced from 82 months to 70 months. In 2012, Scrushy moved from federal prison to a halfway house to home detention. Scrushy is now on three year probation.
Government

Conclusion

In conclusion, Scrushy and his executives made unethical and illegal decisions. The position that Scrushy took during the trial, that his directions to his accountants to fix the books did not imply that he wanted them to falsify documents, does not eliminate his responsibility as a CEO. When he was told that they were going to inflate the books he had a moral and legal responsibility to correct the plan of action. Scrushy made some excellent donations with the money he swindled but he also lived a life of a movie star with money he did not honestly earn. In the end he has been court ordered to pay back the stockholders, complete jail time and cannot run any public company. However, will this change anything? Will the individuals that suffered loss of their income and hope be restored? Will these extensive measures stop the next Enron or Scrushy executive? Will the next set of accountants that are being asked to cook the books think of the SOX law and the criminal penalties? Is the love of money the root of all evil? Further extensive research will have to be conducted on individuals that commit white collar crimes.

References

Barr, P. (2005). Scrushy plots a comeback. As HealthSouth works hard to put a fraud scandal in

the past, its acquitted founder studies how he can regain the company. Modern

Healthcare, 35(27), 6.

Blesch, G. (2009). Being held accountable. Scrushy ordered to pay billions; L.A. exec pleads guilty. Modern Healthcare, 39(25), 16.

Bond, Patti, “CEO’s Troubles like a Country Song,” Atlanta Journal and Constitution, March

22, 2003

Faulk, K. (2011, March 28). Richard Scrushy garage sale means big bargains. The Birmingham

News, p. 1. Retrieved November 28, 2012, from doi: http://blog.al.com/businessnews/2011/03/scrushy_sale_means_big_bargain.html

Heylar, J., Cherry, B., and Neering, P., “The Insatiable King Richard. He started as a Nobody.

He became a hotshot CEO. He tried to be a country star. Then it all came crashing down. The Bizarre Rise and Fall of HealthSouth’s Richard Scrushy,” Fortune, July 7, 2003,

p. 76.

Heylar, John. (2005). “The man who saved Richard Scrushy,” Fortune, 152(2), 26.
House of Representatives Hearings, 2003 “The Financial Collapse of HealthSouth,” Subcommittee on Oversight and Investigations Of the House energy and Commerce Committee. doi: http://www.gpo.gov/fdsys/pkg/CHRG-108hhrg91232/html/CHRG-108hhrg91232.htm
Gordon, A. (2010). In re HealthSouth Corp. Securities Litigation. New York Law School Law Review, 55(2),671-681.
Pellet, Jennifer, “HealthSouth’s Digital Dream,” Chief Executive Officer Bill Owens, “PR Newswire, September 25, 2002
Piotrowski, J. (2003). HealthSouth's most wanted. Founder and former chairman and CEO Richard Scrushy is indicted for 85 counts of conspiracy,
Shareholder's Litigation. (2011). Business Torts Reporter, 23(6), 162-164.
Taylor, Jackie. (2005). Fluke or Failure? Assessing the Sarbanes-Oxley Act after United States v. Scrushy. UMKC Law Review, 74(2), 411-434
The Friend of the Devil (2003). Healthcare Purchasing News, 27(5), 4.
The Securities and Exchange Commission. (2003) Retrieved November 27, 202 from doi: http://www.sec.gov/litigation/complaints/comphealths.htm

Vogt, Katherine, “Ousted HealthSouth Chief invokes the Fifth,” American Medical News,

November 3, 2003, p.29

Watson, Stephanie, “Scrushy, Richard M. 1952-.” International Directory of Business

Biographies, 2005. Retrieved November 27, 2012 from Encylcolpedia.com

doi: http://www.encyclopedia.com/doc/1G2-3448500527.html

doi: http://www.referenceforbusiness.com/biography/S-Z/Scrushy-Richard-M-1952.html#ixzz2Dnl37gDK…...

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...HealthSouth: The Scrushy Way Vonetta M. Henderson Northcentral University Introduction The Enron and Tyco scandals brought visibility to corporate scandals. The magnitude of these scandals resulted in the Sarbanes-Oxley (SOX) Act in 2002. Richard M. Scrushy and HealthSouth Corporation were the first CEO and company to be indicted under the SOX Act. HealthSouth was charged with filing false financial statements with the SEC to hid poor financial conditions from Wall Street. An audit conducted by PricewaterhouseCoopers concluded that HealthSouth overstated its cumulative earnings between $3.8 billion to $4.6 billion (Weld, Bergevin, & Magrath, 2004). Although Scrushy was charged with 85 counts, he pled not-guilty, claiming that he was unaware of the fraudulent activities that had occurred. Scrushy was later exonerated as the investigation into the company found no evidence that Scrushy orchestrated or participated in any financial wrongdoings. Five financial executives and 10 other company officials pled guilty to a variety of charges. Background Richard M. Scrushy founded Amcare, Inc. in 1984. The company opened its first facility in Little Rock, Arkansas and one year later opened a facility in Birmingham and changed its name to HealthSouth Rehabilitation Corporation (HRC). In 1986, HRC went public with its initial public offering (IPO) on the NASDAQ stock exchange (HealthSouth Corporation, 2010). In 1988, HRC moved......

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Accounting Scandal of Worldcom

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