A Medical Device Daily

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 company. 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 (Medical Device Daily, July 25, 2005).

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 the spring of 2003 (MDD, June 29, 2005).

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 (MDD, Oct. 6, 2005).

In July 2006 both men were found guilty of the bribery charges (MDD, July 5, 2006). 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 (MDD, Dec. 15, 2006).

In other legalities:

• Cardinal Health (Dublin, Ohio) said it has established a $600 million reserve associated with a pending class-action securities lawsuit, representing, the company 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.

• Hanger Orthopedic Group (Bethesda, Maryland) said that on March 16, the U.S. District Court for the District of Maryland Southern Division granted Hanger's motion to dismiss with prejudice the consolidated class action complaints previously brought against it and certain directors and officers, and that the 30-day period permitted for an appeal or motion for reconsideration had passed without the filing of any appeal or motion.

The consolidated class action complaints by Twist Partners and other plaintiffs alleged securities law violations primarily related to alleged billing improprieties at one of Hanger's patient-care facilities.

• The SEC reported yesterday the filing of securities fraud charges against the husband of a vice president at Amgen (Thousand Oaks, California) for engaging in insider trading in the stock of Abgenix (Fremont, California), a biopharmaceutical company acquired by Amgen in April 2006.

The SEC's complaint alleges that Gary Melton, of Newbury Park, California, misappropriated confidential information from his wife, Amgen's VP of strategic sourcing and procurement, regarding Abgenix when he bought Abgenix stock days before Amgen's acquisition of Abgenix was made public. Melton made $15,252 in profits from the trades and has agreed to pay about $31,000 to settle the charges.

According to the SEC's complaint, in early November 2005, Melton and his wife discussed the publicly disclosed favorable results of a clinical trial for an antibody jointly developed by Amgen and Abgenix. At the time, Melton told his wife that he might buy some Abgenix stock, to which his wife said nothing, the SEC said. Melton's wife reported directly to Amgen's CFO and attended meetings where there was M&A discussion.

A month later, according to the complaint, Melton's wife learned through her employment at Amgen that a public announcement of Amgen's acquisition of Abgenix was imminent. She then told her husband not to buy Abgenix. The complaint further alleges that Melton understood his wife's unexplained instruction to mean that more favorable news about Abgenix was forthcoming, and that Melton knew, or was reckless in not knowing, that his wife's instruction not to purchase Abgenix stock was based on material non-public information acquired through her employment at Amgen and that he could not lawfully use such information for his personal benefit.

Melton then bought 2,050 shares of Abgenix stock between Dec. 8-13, 2005. After the market closed on Dec. 14, 2005, Amgen reported its acquisition of Abgenix for $22.50 a share, a 54% premium on the closing price of Abgenix stock that day. On Dec. 15 Melton liquidated his Abgenix stock for a profit of $15,252.