HealthSouth founder loses $2.9B appeal

Jessica M. Karmasek Jan. 31, 2011, 2:17pm


MONTGOMERY, Ala. (Legal Newsline) - The Alabama Supreme Court has upheld a $2.9 billion civil verdict against the founder and former CEO of HealthSouth Corp. for accounting fraud.

The Court, in its 58-page opinion filed Friday, said Richard Scrushy "demonstrated no error in any aspect of the trial court's judgment."

In March 2003, federal authorities learned that, beginning in 1994, HealthSouth corporate officers had engaged in a fraudulent accounting scheme of "massive" proportion.

Criminal charges were filed against various alleged conspiratorial HealthSouth officers as early as April 2003 in the United States District Court for the Northern District of Alabama.

Eventually, at least 15 senior HealthSouth executives pleaded guilty to various criminal acts, including criminal fraud -- specifically regarding the accuracy, reliability, falsification and fabrication of the financial information and documentation that HealthSouth was legally required to file from 1996 to 2002.

On Aug. 8, 2003, Wade C. Tucker, a shareholder of HealthSouth since August 1998, filed his own amended complaint alleging improper "interested transactions," waste and "misappropriation of corporate assets;" unjust enrichment; breach of contract; conspiracy; "intentional, reckless, and innocent misrepresentation and suppression;" breach of fiduciary duty of loyalty, related to fraud, false accounting, and "insider trading;" and seeking to impose a constructive trust.

On June 18, 2009, the trial court entered a final judgment in favor of the plaintiffs, including Tucker, for $2,876,103,000.

The trial court stated its "firm and confident conclusion that Scrushy knew of and participated in the fraud from and after the summer of 1996" but that, in any event, he had "clearly breached his fiduciary duty of loyalty by consciously disregarding his responsibilities to HealthSouth."

Scrushy, in his appeal of the judgment, argued the following:

- The trial court lacked subject-matter jurisdiction;

- Evidence regarding the damage sustained by HealthSouth in the First Cambridge and Digital Hospital projects was improperly admitted and considered; and

- His involvement in the two projects was shielded by the business-judgment rule.

Justice Thomas A. Woodall, who authored the Court's opinion, wrote of Scrushy's first charge, "We hold, therefore, that Tucker's original complaint, notwithstanding its alleged lack of specificity as to demand excusal, did not fail to invoke the subject-matter jurisdiction of the trial court and that Tucker's third amended complaint is not a nullity."

Woodall said of the evidence relating to First Cambridge and the Digital Hospital, "Much of the evidence on which the trial court based its award was entered by stipulation. Other evidence relating to First Cambridge and the Digital Hospital was presented at the trial by Scrushy himself or without his objection.

"In no event did Scrushy ever argue that he 'would be actually prejudiced in maintaining his... defense on the merits by the admission of the evidence,'" the Court continued.

"Consequently, Scrushy has not demonstrated that the trial court exceeded its discretion in considering evidence relating to First Cambridge or the Digital Hospital."

As to Scrushy's argument that his involvement in the two projects, and thus shielded by the business-judgment rule, the Court wrote, "Unchallenged findings made in this case demonstrate that the elements of the business-judgment rule -- specifically, but not exclusively, the element of good faith -- were not satisfied.

"According to the trial court, the transactions involving First Cambridge and the Digital Hospital were linked to, or tainted by, the fraud. Contrary, therefore, to Scrushy's position, the business-judgment rule does not apply to these transactions."

The business-judgment rule basically protects a board of directors from being questioned or second-guessed on conduct of corporate affairs.

Scrushy is currently serving a six-year, 10-month federal prison sentence after a jury convicted him of giving former Alabama Gov. Dan Siegelman a campaign donation in return for a seat on a state hospital board.

From Legal Newsline: Reach Jessica Karmasek by e-mail at

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