Scrushy Attorney Critiques

February 15, 2007

A Tale of Two Trials:

Lessons to Learn From the Scrushy Story

Defense lawyers and prosecutors say much about the last five years in Scrushy’s legal life has been misunderstood

By Ben Hallman

It is a warm fall morning in Birmingham, and Donald Watkins is in town for a meeting. The hotel-like condition of his office in the back of a bank he founded suggests that this a rare occurrence. The trash can is empty, the desk is spotless and the most recent book on the shelf is an unread copy of Michael Lewis’s 2003 opus “Moneyball.”

Watkins is retired from the law, a point he repeats several times with obvious pleasure. Last year he left Alabama for Miami. Florida has beaches, which he likes, and no state income tax, which he likes even more.

He also left behind the continuing legal woes of Richard Scrushy, the man he represented in his last case as a lawyer in Birmingham. (See Timeline for the Scrushy Saga.)

Watkins helped engineer Scrushy’s surprising victory a year and a half ago on charges that he defrauded investors in HealthSouth Corp., a national chain of rehabilitation clinics. Watkins saw his standing in Birmingham plummet after the win. As one former city official puts it: “Many people think he’s a tainted commodity.” (For his part, Watkins says he’s simply pursuing business interests in Florida.)

Tainted is a point for debate. His achievement is not. Authorities have obtained hundreds of convictions or guilty pleas from corporate executives accused of financial misdeeds in the last five years, including long jail sentences for former CEOs L. Dennis Kozlowski of Tyco International, Bernard Ebbers of WorldCom Inc. and John Rigas of Adelphia Communications Corp.

Scrushy, the first and only CEO charged under the antifraud Sarbanes-Oxley Act, walked. The problem for Scrushy is that his trial team’s winning formula has only worked once. In a separate criminal case completed last summer, Scrushy was convicted of bribing former Alabama governor Don Siegelman for a seat on a state board that controls hospital expansion.

LESSONS TO LEARN

Defense lawyers and prosecutors, many speaking at length about the trials for the first time, say that much about the last five years in Scrushy’s legal life has been misunderstood. In the standard telling of the first Scrushy trial, the defense win comes down to race and the home field advantage he supposedly enjoyed. Without a doubt, the team ran an effective media blitz to mobilize support among African-Americans in a majority black city.

But Scrushy’s side also won because of prosecution missteps, sympathetic rulings from the bench (too sympathetic in the view of several lawyers involved in the case) and a defense team that understood every nuance of appearing before a jury in Birmingham.

 

His lawyers presented a cohesive, charming courtroom front — even though behind the scenes the defense had been roiled by disagreements over strategy and defections.

Scrushy’s lawyers in the second trial, this one held in Montgomery, tried many of the same tactics that their colleagues employed successfully in 2005, but also adopted some of their adversaries’ bad habits, the lawyers say.

Scrushy’s lawyers in the second trial lost their cool in the courtroom. They often appeared rudderless, and allowed the other side to dictate the pace of action. And they made comparisons between Scrushy and Martin Luther King Jr., that even one of their colleagues calls over the top. At the same time, a new team of prosecutors were on their game, and a different judge gave the defense far less leeway.

In the coming months Scrushy is scheduled for a third court battle, a civil case brought by the Securities and Exchange Commission over the HealthSouth debacle. Also this year, a long-delayed investors suit will likely come to a head. As of press time Scrushy’s lawyers were in federal court arguing that a proposed $445 million HealthSouth settlement with investors would leave their client still vulnerable to the claims of these investors.

For the lawyers arguing these cases, the outcomes may hinge on what lessons they learned from the first two trials. Watkins, for one, thinks these lessons have been largely ignored. A tall man with a cultured Southern accent, Watkins is persuasive, with a knack for framing questions to appeal to his audience. “Of 83 CEOs charged with securities fraud [since 2002], all were convicted except one, Richard Scrushy. What you want to know is how it was done.” He leans forward. “Right?”

FIRST TRIAL HAD PLENTY OF DAMNING MATERIAL

By the time the first trial began on Jan. 5, 2005, Alice Martin, U.S. Attorney for the Northern District of Alabama, and Richard Smith, deputy chief of litigation in the fraud division of the U.S. Department of Justice, had worked for more than two years building a case against Scrushy.

They had plenty of damning material. Scrushy’s HealthSouth had been a Wall Street darling, but in the weeks after the July 2002 passage of the Sarbanes-Oxley corporate governance reforms, the empire began to crumble.

A particular problem for the company was a provision of the law that requires top corporate officers to personally sign off on the accuracy of financial reports. Then-CFO Weston Smith wouldn’t do it and threatened to quit if he was forced to do so. Scrushy, he and others later testified, had been ordering company officials to doctor HealthSouth’s reports to cover up poor earnings.

Not long after Smith’s refusal to certify reports, the company announced that it had lost $175 million, and its stock price plummeted 60 percent in two days. Less than a month before, Scrushy had sold nearly half his stock in the company. The timing of the sale prompted an SEC investigation. By March 2003 Scrushy had been fired and was being investigated by Justice.

To call Scrushy’s situation a stunning turnaround is an understatement. He had been dubbed “the emperor of Alabama” during HeathSouth’s glory days, and he had a penchant for building monuments to himself that appeared with a frequency usually reserved in Alabama for dead football coaches and Civil War heroes.

There was a Richard Scrushy Boulevard, a Richard Scrushy Public Library and, on the HealthSouth campus, a Richard Scrushy museum. A former friend, local columnist Paul Finebaum, told “60 Minutes” that if Scrushy went to jail, he would name the prison after himself.

Birmingham was turning against Scrushy. The most enduring image from the days that followed HealthSouth’s financial meltdown was a photo of a bronze statue of Scrushy on the HealthSouth campus. Someone painted “THIEF” in big letters from neck to knee. HealthSouth officials ordered it removed after a local radio host exhorted his listeners to pull it down like the statue of Saddam Hussein in Baghdad.

DEFENSE PLAYS IT LOCAL

Scrushy’s newly hired legal team began its work by trying to rehabilitate his image in Birmingham. Before and during the six-month trial, Scrushy toured the African-American community, making hefty donations to churches (several black pastors were regular guests in the courtroom). He hosted a religious-themed morning show called “Viewpoint,” and was seen in the company of prominent black citizens, most notably former mayor Richard Arrington.

Arrington, Birmingham’s first black mayor, was a still-popular figure in the African-American community and had spent his last years in office facing down a criminal investigation of his own (formal charges were never filed against Arrington). It was Arrington who urged Watkins, his lawyer during that period, to represent Scrushy.

Watkins, who helped engineer the PR blitz, says the appeal to the local community was more than just one of race. After all, five white jurors agreed to acquit Scrushy.

Instead, Watkins sold Scrushy to Birmingham as one of them, a pious, local boy facing the same kind of government persecution as their beloved former mayor, who, by the way, just happened to be Scrushy’s personal friend. The distinction between community- and race-based appeals would later be lost on Scrushy and his legal team — with disastrous consequences in the Siegelman bribery trial.

FIRST TRIAL’S REVOLVING DEFENSE CAST

Not everyone loved the community-based strategy. Scrushy’s legal team was in frequent turmoil before the trial. Though Watkins was a constant, the revolving defense cast included former White House special counsel Lanny Davis, then at Patton Boggs and now a partner at Orrick, Herrington & Sutcliffe; Jones Day partner Jonathan Rose; and Chadbourne & Parke’s Abbe Lowell.

Lowell’s departure, in particular, three months before the trial began, seemed to spell disaster. Lowell declined to comment, but lawyers familiar with the case say he objected to what he saw as an overly aggressive campaign to curry favor with the local community, and to Watkins’s incessant criticism of government lawyers. Chadbourne, in a statement, says it was a mutual decision.

Watkins says Lowell left when he learned that James Parkman III, a small-town lawyer whose chief qualification seemed to be that he was a law partner of Scrushy’s brother-in-law, would be taking over as lead counsel. “I didn’t think we could win with his ëtextbook’ trial strategy, and a New York-style courtroom presentation,” Watkins says. “His law firm withdrew because they did not want nationally known Abbe riding the bench in the shadows of little-known Jim Parkman.” Scrushy also brought aboard Arthur Leach, a former federal prosecutor from Atlanta, to round out the trial team.

Playing it local — or at least with a strong southern flavor — stood in contrast to the prosecution. Despite the pretrial problems, Watkins says part of his “system” for winning was appearing at home in the courthouse. The defense team daily held a veritable love-in at its table — Watkins, Parkman and Leach hugged, joked and chatted up everyone from the court reporter to the janitor. “You don’t want to come off as a stranger or an unwelcome guest,” Watkins says.

PROSECUTORS IN FIRST TRIAL STRUGGLE

Prosecutors, on the other hand, seemed at times to have a frosty relationship, lawyers who were in the courtroom say, which may have stemmed from tensions between local and Washington, D.C., prosecutors, who had come to Alabama to assist the small local office. “They were missing a captain of the ship,” says J. Douglas Jones, a former U.S. Attorney in Birmingham now at plaintiffs firm Whatley Drake & Kallas. “Department of Justice investigators were trying to coordinate and direct the U.S. Attorney. It was the makings of a disaster.”

In an exchange via e-mail, Alice Martin disputed this characterization. “We were a team, and we performed as a team.” Smith and Richard Wiedis, another prosecutor, declined to comment on internal dynamics of the prosecution team.

Another no-no: openly fighting with federal judge Karon Bowdre. “I’ve tried lots of cases and have never seen such bad chemistry between one side and the judge,” says Michael Madigan, a partner at Akin Gump Strauss Hauer & Feld who represented several of the directors on HealthSouth’s board.

Manners matter in Alabama. Louis Franklin Sr., a veteran prosecutor who tried the second case as acting U.S. Attorney for the Middle District of Alabama, recalls meeting one of the Justice lawyers in the fraud case — he won’t say who — who bragged about fighting with Bowdre. “I remember thinking: ëDude, you don’t do that.'”

Prosecutors were angry that Bowdre was allowing the defense to attack the character of government witnesses. One former CFO using antidepressants was on “mind-altering drugs,” according to the defense. The defense was also allowed to refer to another CFO’s extramarital affair.

Bowdre held nightly hearings to determine whether to allow hearsay testimony from one conspirator about another, though prosecutors contend a conspiracy at HealthSouth had long been established. The hearings gave the defense a preview of upcoming testimony, Smith says. Government lawyers were also furious that Bowdre didn’t gag the defense, which was holding press conferences on the courthouse steps. “Disagreements we had in private made it to the press that afternoon,” Smith says.

‘THE DEFENSE RAN THE COURTROOM’

If the prosecution suffered at the hands of Bowdre, the defense prospered. Parkman, in particular, was allowed to get away with theatrics that other judges would clamp down on, say local attorneys — in his closing, for example, he brought in a large picture of a rat, which he compared to the CFOs. “It was a Judge Ito situation,” says one local attorney, not the first O.J. Simpson analogy made by lawyers interviewed about the case. “The defense ran the courtroom.”

Madigan says Bowdre, who acknowledged publicly that she was a neophyte in criminal law when she was assigned the case, appeared throughout “woefully inexperienced and unsure of herself, particularly in regard to evidentiary rulings.” Bowdre did not respond to requests to comment, but she has supporters, too. “Any losing side will complain about the court,” Jones says. “In my view, the government lost the respect of the judge.” He says government prosecutors are to blame for Scrushy’s acquittal: “The prosecutors fundamentally misunderstood the defense. This was a street brawl.”

Prosecutors had another problem: their indictment. They had charged Scrushy with 85 counts that covered 10 crimes, including mail fraud, money laundering and conspiracy. The kitchen sink approach would backfire. They had made too many complicated charges and couldn’t “simplify it, make it palatable to the jury,” Madigan says. Testimony was complicated, too, and the CFOs droned on for far too long. As one lawyer connected with the case puts it: “Nobody in the South likes a snitch. Get them on the stand and get them off as fast as possible.”

That problem seemed clear in posttrial interviews with jurors. They strongly questioned the credibility of the five former CFOs. Of course, defense attacks had also worked. Watkins says the defense worked to “crush” these government witnesses. They were helped by the light sentences that U.S. district court judge U.W. Clemon had meted out to three of the CFOs, suggesting that prosecutors had given the former CFOs sweetheart deals in order to testify.

In his closing argument, Watkins exhorted the jury to send a message. “They are watching. The folks up in D.C., the big shots, the ones who call the plays, who make decisions for the group here, I am talking about the bourbon-sipping, martini-drinking, cigar-smoking crowd … . You tell my government no more getting on your knees when they come in without a fight, surrendering, hands up, waving the white flag.”

After deliberating for three weeks, the jury acquitted Scrushy of all charges on June 28, 2005.

DEFENSE TEAM UNDERGOES MAKEOVER AFTER SECOND INDICTMENT

That was the high point for Scrushy. In October 2005 he was indicted again along with former governor Siegelman on bribery and conspiracy charges. Federal prosecutors in Montgomery said Siegelman agreed to appoint Scrushy to a hospital regulatory board in exchange for arranging $500,000 in donations for a referendum on a statewide lottery.

True to form, the Scrushy trial team underwent another makeover. Watkins — spokesman, protocol officer and tone-setter for the defense — retired. Parkman, nicknamed “Matlock” by jurors in the Birmingham trial for his aw-shucks demeanor, departed to join Johnnie Cochran’s law firm.

That left Leach, the former federal prosecutor, and a handful of local attorneys, including veteran civil rights lawyer Fred Gray. Leach’s role in the first trial was as evidentiary expert; in the second trial he also assumed the mantle of lead trial counsel. “It made a big difference,” says Franklin. “[Leach] is a seasoned prosecutor, but he doesn’t have the charisma” of Watkins and Parkman.

Parkman says Leach simply lacked experience: “Art had tried a few cases as a prosecutor and a few as a defense lawyer, but over the long haul nothing of a substantial nature.” He says that the inexperience of the defense team as a whole showed in the courtroom, particularly in several heated confrontations with prosecutors.

On one occasion, Franklin grew frustrated over defense objections and mumbled something under his breath about Terry Butts, one of Scrushy’s lawyers. (Franklin wouldn’t say what he muttered, and Butts declined to comment.) Butts picked up on it, walked over to Franklin and asked him in a challenging manner to repeat what he had said. “I could feel the whiskers on his face,” Franklin recalls. “I lost it and challenged him back. I honestly thought we were going to come to blows.”

Parkman says Butts, a former Alabama Supreme Court justice, should have made a self-deprecating joke, or just blown it off. “When that happens, the defense loses,” Parkman says. “You lose sight of the case and lose sight of the client.”

Franklin, an otherwise affable career prosecutor, says that his was an easier case to try, that juries grasp bribery as a concept better than the intricacies of arcane accounting rules. A paper trail tied Scrushy to the bribe, he says — a key difference from the fraud trial, where despite a wealth of witnesses and circumstantial evidence, prosecutors were unable to present written orders from Scrushy to show he directed the fraud. Another difference, Franklin says, was that they had a more educated jury, including a foreman who was a fund-raiser for Auburn University, “so he knew how fund raising was supposed to work.”

GOVERNMENT LEARNS ITS LESSON FROM THE FIRST TRIAL

Government lawyers also made an effort to simplify their case, Franklin says. That started with the indictments. This time Scrushy faced six charges. The simplification effort continued with the witnesses. Franklin’s team called just one of the five former CFOs to testify — Martin, who testified that Scrushy had bragged to him about the bribe. “We did try to streamline the case,” Franklin says.

Despite their efforts, Franklin says, defense lawyers managed to drag everything out. “We would examine a witness for three hours,” he says. “They would cross-examine for three days.” Parkman says in those cross-examinations, defense lawyers played the government’s game by focusing on documents instead of the credibility of the witnesses. But that had a lot to do with the judge, other lawyers say. U.S. district court judge Mark Fuller didn’t allow Scrushy’s lawyers as much leeway. When the defense tried again to portray a witness using antidepressants as a drug abuser because of antidepressant use, for example, Fuller quickly cut off the line of questioning.

Franklin doesn’t discount the importance of trying the case in a friendlier venue. In Birmingham, the years-long battle between former mayor Arrington and the U.S. Attorney’s Office had been damaging for the government. Montgomery prosecutors had none of that baggage and were less likely to be seen unfavorably by juries.

There was also little of the antipathy between the judge and the prosecutors that existed in the fraud trial. This was a local effort staffed out of the Montgomery U.S. Attorney’s office, and the relationship between the local prosecutors and judges was collegial. “We have to work together every day,” Franklin says.

GLARING DIFFERENCE BETWEEN TRIALS IS RACIAL RHETORIC

The most glaring difference between the two Scrushy trials is how the defense handled race. Watkins mostly avoided racial rhetoric in the courtroom (though he did refer to Scrushy as “the boy from the other side of the Edmund Pettus Bridge,” the site of a famous Selma, Ala., clash between police and civil rights marchers).

In contrast, the Montgomery team’s appeal to black jurors had all the nuance of a bulldozer. In his closing statement, Gray, who had represented Martin Luther King, Jr., and Rosa Parks, asked the jury to return a not guilty verdict “to make Dr. King’s dream come true.” As Gray spoke, according to an account in Mobile’s Press-Register, another member of the Scrushy legal team quietly put up a poster board of King’s “I Have a Dream” speech.

With his voice rising to a crescendo, Gray implored federal jurors to “fulfill Dr. King’s dream and fulfill that old song.” He continued: “Free at last! Free at last! Thank God almighty we’re free at last!”

The tone of Gray’s argument suggests it wasn’t just the media that seized on race as the deciding issue in the first Scrushy trial. Interestingly, Scrushy himself seems not to have understood what Watkins was up to in Birmingham. Parkman says that hiring Gray, who was brought in for the opening and closing arguments, was a mistake. “It sends the signal he’s doing it for one reason and one reason only, to buy the African-American vote,” he says. There’s just no comparing Scrushy to King, he says, and doing so is likely to make black jurors mad. In Montgomery, the birthplace of the modern civil rights movement, Scrushy’s lawyers dared to compare his struggles with those of icons.

Leach declines to say what he thought of Gray’s presentation, but says one should focus on “the totality of the closing argument.” He says that he and Gray discussed strategy beforehand but didn’t talk about every detail. “You never cover the way a lawyer makes his pitch,” he says. Gray says that his speech referring to King has been misconstrued, but declined to comment further.

The jury of seven blacks and five whites — the same breakdown as in the first trial — convicted Scrushy and Siegelman on June 29, 2006. The defense contested the ruling, arguing that some of the jurors had improperly used the Internet for research during the trial. In December, Fuller denied a request for a new trial, ruling that the information the jurors had sought out was “harmless.”

The court has not ruled on Siegelman and Scrushy’s challenge of the racial makeup of the 2001 grand jury pool. They argue that it had too few African-Americans. Leach says they will appeal the trial verdict to the 11th U.S. Circuit Court of Appeals.

Leach says that campaign contributions like the one Scrushy was convicted for are simply “Alabama politics,” and that there was no quid pro quo arrangement that linked the donation to the board seat. He says the facts of the second trial make comparisons to the first difficult. Even so, the defense template looked awfully similar. “I don’t say this to malign other lawyers, but I have no doubt I could have won the [second trial],” Parkman says. “They made it a trial about paper and documents, when it should have been about people.”

LOOKING AHEAD TO FUTURE ACTIONS

It’s just after 9 a.m. on a Thursday morning, and Douglas Jones is standing in front of a classroom at a high school near downtown Birmingham. For the umpteenth time, Jones is talking about the trials of Tommy Blanton and Bobby Frank Cherry, former Ku Klux Klansmen who were convicted during his reign as U.S. Attorney of the 1963 bombing of the Sixteenth Street Baptist Church. The presentation is factual, orderly and, if not particularly flashy, definitely moving.

Jones of Whatley Drake represents a group of HealthSouth investors who are suing Scrushy (he also briefly represented Siegelman in the bribery case). That case has been consolidated with others filed against HealthSouth, Ernst & Young and banks that had backed the company. Judge Inge Johnson is set to rule soon on a $445 million partial settlement reached between HealthSouth and some investors; if approved, that settlement would preclude Scrushy’s claims against HealthSouth (he recently agreed to pay the company $31 million as part of a settlement over legal fees).

Lawyers from both sides say they are prepared to go to trial, but are waiting to hear from Johnson what claims can go forward. If it comes to that, one outcome from the first trial seems unlikely: It would be hard to out-Birmingham Jones. “Doug Jones has standing in the black community,” says Robert Corley, Director of the Center for Urban Affairs at the University of Alabama at Birmingham. “He’s very effective with Alabama juries. You wouldn’t think of him being powerful, but he has a wonderful way of weaving a story.”

Whether the same can be said for SEC lawyers in their upcoming civil securities trial remains to be seen. That trial was recently pushed back to June 4. In her order, Johnson said she hoped that would give the parties time to settle. John Worland Jr., an attorney in the D.C. office, is handling the case. Worland didn’t respond to requests for comment, but his case likely faces an easier road. The burden of proof is less in civil trials — a jury can find liability based on a “preponderance of evidence.”

Some lawyers say that Scrushy will inevitably have to pay something to the SEC and to the investors — after all, he admits that a fraud occurred at HealthSouth, and there is no denying that he profited from it. But David Russell, a securities partner at Parker, Hudson, Rainer & Dobbs in Atlanta, is not ready to surrender this ground. “Investors have yet to prove he knew of the fraud, participated in it or that he was negligent in not knowing about it,” he says.

Russell declined to discuss defense team strategy, but the venue, evidence and two out of three lawyers — Parkman and Leach — are the same. Scrushy recently shuffled the deck again. Parkman, fresh from defending a suspected Swedish mobster charged with driving a stolen Ferrari into a telephone pole in California, is back in charge. Parkman says Leach will “maybe” have a role, and that the decision is Parkman’s to make. For his part, Leach says he has represented Scrushy throughout and expects to continue to do so.

Parkman is confident that he will get the Scrushy defense train back on track. He also says that Watkins is still available to provide strategic wisdom, a point echoed by Leach: “Just because he’s not of counsel doesn’t mean he’s fallen off the face of the earth.”

For his part, Watkins seems less involved with the details of the case than one might expect after talking to Leach and Parkman. But maybe that doesn’t matter. The essence of the Watkins strategy never relied much on details anyway. He is more interested in broad concepts — in symphonies, not notes: Scrushy is a local boy done wrong; federal prosecutors are interlopers in our home.

He may be retired from the law, but he hasn’t lost his talent for asking the right question. He knows what will impress. “I walked my CEO out of the courtroom a free man,” he says. “How many other lawyers can say that?”

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