A Diagnostics & Imaging Week

HealthSouth (Birmingham, Alabama) founder Richard Scrushy will settle a Securities and Exchange Commission lawsuit for $81 million as penalty for the organization’s $2.6 billion accounting fraud while he headed the comopany. The settlement is one of the largest against an individual, according to the SEC.

Without admitting or denying any of the SEC’s allegations, Scrushy agreed to pay $77.5 million that the government claimed he profited from in the HealthSouth fraud and another $3.5 million in civil penalties.

Scrushy may end up paying less than $10 million as his attorneys contend he is running out of money. Scrushy will get credit for $71.5 million he already has paid or forfeited in three other cases linked to HealthSouth, leaving him owing $9.5 million, but the total could be reduced further by other cases.

The deal permanently bars Scrushy from serving as an officer or director of a public company and enjoins him from committing future anti-fraud violations.

The SEC charged Scrushy with directing the accounting fraud at HealthSouth from 1996 through 2002. Scrushy was one of HealthSouth’s founders, and its CEO and chairman while the fraud was being orchestrated.

The SEC alleged that, at Scrushy’s direction, HealthSouth overstated its revenue by more than $2.6 billion from 2Q96 through 3Q02. This overstatement led directly to quarterly and annual overstatements of net income and earnings. The SEC said that by the end of 2002, HealthSouth was claiming to have more than $1.5 billion in accumulated earnings, when in fact it had operated at a significant loss over its entire corporate history.

The HealthSouth fraud resulted in one of the largest accounting restatements in American corporate history.

The settlement gives Scrushy 90 days to submit proof that he is unable to pay even the $9.5 million penalty. But he does not have to count the value of his retirement accounts or Birmingham-area estate when computing his worth, according to the AP report.

The SEC initially said it was seeking as much as $785 million from Scrushy.

In June 2005 an Alabama jury ruled that on 36 counts ranging from conspiracy to fraud and money laundering, Scrushy was not responsible for masterminding the accounting fraud at HealthSouth, the rehabilitation conglomerate he founded in 1984 and headed until being fired by the company in spring of 2003.

Later that year, Scrushy headed back to the courtroom after being charged with bribery and mail fraud. That indictment alleged that he made “disguised” payments of $500,000 to the election campaign of former Alabama Gov. Don Siegelman in exchange for an appointment to a state medical board that makes decisions concerning construction of new hospitals and authorization of additional bed spaces.

In July 2006 both men were found guilty of the bribery charges. They then asked for a new trial claiming that jurors communicated with each other by email during the trial and that they had considered outside material from the Internet during deliberations. A federal judge refused the new trial.

In other legalities:

• Cardinal Health (Dublin, Ohio) said it has established a $600 million reserve associated with a pending class-action securities lawsuit, representing, said, its current estimate to reach a mediated settlement with counsel for the class.

Cardinal said the reserve will result in an after-tax charge to 3Q earnings of about $384 million. The company said negotiations are ongoing and there is no assurance the matter will be resolved through mediation.

The class-action litigation relates to Cardinal Health’s financial reporting and disclosures between FY00 and FY04.

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