By REED ABELSON
and JONATHAN GLATER
If ever a chief executive seemed destined for prison, it was Richard M. Scrushy. Mr. Scrushy has always maintained his innocence. But at his trial, no one disputed that there was a staggering $2.7 billion accounting fraud at HealthSouth, the company he helped found in 1984.
Federal prosecutors lined up many former executives, including five former chief financial officers, to testify that Mr. Scrushy orchestrated the wrongdoing. In court, they played a secret tape- recording that seemed to incriminate him.
Jurors, who heard from dozens of witnesses but never the man himself, agreed with Mr. Scrushy – to the surprise of many lawyers watching the case. “It’s a stunner, given how strong the government’s case seemed to be,” said Gregory J. Wallance, a former prosecutor who is now a partner at Kaye Scholer in New York.
The outcome of the case makes clear the importance of having lawyers who can connect with jurors, both inside and outside the courtroom. And the decision to hold the trial in Mr. Scrushy’s hometown, Birmingham, Ala., may have given his lawyers an advantage in presenting him as a local boy made good, then unfairly brought low by underlings eager to pass the blame.
“I don’t see this as a broad defeat and a broad repudiation of federal law enforcement efforts in general,” said Orin Snyder, a former federal prosecutor at Gibson Dunn & Crutcher in New York.
“It’s a defeat for these particular prosecutors in this particular case.”
Federal prosecutors have had several major successes of late, lawyers say, pointing to the conviction of former chief executives like L. Dennis Kozlowski of Tyco and Bernard J. Ebbers of WorldCom.
Legal experts say, however, that this acquittal should have little effect on other prosecutions or on the enforcement of the Sarbanes-Oxley Act, the broad corporate reform legislation passed in 2002 after sweeping frauds at Enron, WorldCom and other companies.
Mr. Scrushy was the first chief executive of a major company to be charged under a section of the law that requires top company officials to certify their financial statements as accurate. This case was unusual, lawyers say, adding that the playing field may have been tilted in Mr. Scrushy’s favor. He was tried and acquitted in a city where his generosity was well known and his religious faith was on public display through his television broadcasts and his preaching at black churches.
“It was venue,” said George B. Newhouse Jr., a former federal prosecutor at Thelen Reid & Priest in Los Angeles. “As in the O. J. Simpson trial, the key mistake was where they brought the case.”
James D. Wareham, a defense lawyer at Paul, Hastings, Janofsky & Walker in Washington, agreed. “This was a Southern case tried in a Southern manner.”
Mr. Wareham said prosecutors would probably have convicted Mr. Scrushy had they tried him in New York. Prosecutors could have but they did not seek to try Mr. Scrushy outside of Birmingham.
The verdict vindicates Mr. Scrushy’s decision to rely on a local defense team, comprising lawyers largely unknown outside Birmingham. Led by Donald V. Watkins, a prominent black lawyer and businessman in Birmingham who served as overall strategist, the team was able to capitalize on knowledge of the community, picking jurors who might be sympathetic to their client and tailoring their arguments to them.
Mr. Watkins was able to refashion the image of his client from a wealthy entrepreneur who lived the high life into a devout Christian, able to win the support of many in the working-class and black communities.
While Mr. Scrushy flirted with some higher-profile lawyers from firms like Chadbourne & Park and the Rose Law Firm of Little Rock, Ark., his courtroom efforts were handled largely by a relative unknown from Alabama, Jim Parkman. He practices law with Mr. Scrushy’s son-in-law, Martin Adams, another member of the defense team.
Mr. Parkman effectively deployed Southern charm and a homespun style, addressing the judge as “Ma’am,” characterizing one prosecution witness as looking “clean as a Winn-Dixie chitlin'” and deriding another – a former chief financial officer, William T. Owens – by saying, “So they bring the big rat in and he squeals, ëTrust me, believe me.'”
Mr. Watkins also appealed to the racial sympathies of the jury, eventually comprising seven blacks and five whites. In his closing argument, he recalled his childhood in segregated Montgomery, Ala. “They use all these titles in here – ëdefendant’ and ëMr. Scrushy,'” Mr. Watkins said to the jurors. “He is ëRichard’ to me. The man who grew up on the other side of the Edmund Pettus Bridge.” He was alluding to a Selma landmark that civil rights marchers crossed on their way to Montgomery. They were beaten in Selma by Alabama state troopers and local police. Some lawyers said they thought the strategy might have helped the defense. “Those efforts that he made, going on TV down there in Alabama and all the rest, must have helped him,” said Roland Riopelle, a former prosecutor and now a partner at Secarz & Riopelle in New York.
But Pamela H. Bucy, a law professor at the University of Alabama, argued that the defense simply out-lawyered the prosecution, which included Alice Martin, the United States attorney from Alabama. “If you look at the evidence, it’s a surprising verdict,” Ms. Bucy said. “If you look at how the case went in the courtroom, it’s not a surprise.”
Prosecutors were unable to make the case simple enough for the jury, and the presentation frequently left them bored, she said.
Judge Karon O. Bowdre of Federal District Court also appeared frequently irritated with the prosecution. She even slammed her gavel down after one of the government’s lawyers, Richard N. Wiedis, appeared to compare the misconduct at HealthSouth to the fraud at Enron. She told the jury that any comparison of HealthSouth to Enron was improper because Enron involved a corporate failure, while HealthSouth “is going strong.”
And despite the appearance of the five chief financial officers as witnesses for the prosecution, jurors were apparently reluctant to believe their word against that of Mr. Scrushy. Prosecutors were unable to provide any direct evidence linking Mr. Scrushy to the fraud.
“One of the lessons to draw from cases like this is that corroboration in the form of documents, e-mails, tape recordings, is essential to the government’s case,” said Jason Brown, a former federal prosecutor now at Holland & Knight.
And while lawyers say it is difficult to know for sure whether it benefits defendants to testify in their own behalf, Mr. Scrushy’s acquittal and the recent convictions of Mr. Kozlowski and Mr. Ebbers, who testified, may suggest the risk is too great, Mr. Brown said.
But lawyers said the decision not to have Mr. Scrushy testify – and all the other decisions made by defense lawyers in the case – probably hold few lessons for other white-collar defendants like Kenneth L. Lay and Jeffrey K. Skilling, former executives at Enron whose trials are expected later this year.
“I actually think that this case is unique,” Mr. Snyder said. “There seems to have been a dynamic in that courtroom that was favorable to Scrushy.”
Correction: Wednesday, June 29:
A news analysis article in Business Day about the acquittal of the former chief executive of HealthSouth, Richard M. Scrushy, misstated the jurisdiction of the prosecutors in the conviction of two former Tyco officers, L. Dennis Kozlowski and Mark H. Swartz. They were New York State prosecutors, not federal.
Kyle Whitmire contributed reporting from Birmingham, Ala., for this article.