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US: Judge Orders Ex-HealthSouth Chief to Repay Nearly $48 Million

by Kyle WhitmireThe New York Times
January 4th, 2006

A judge in Alabama ruled Tuesday that the former chief executive of HealthSouth, Richard M. Scrushy, must repay his former company more than $47.8 million in bonuses.

The ruling was returned Tuesday by Judge Allwin E. Horn III of Jefferson County Circuit Court in Birmingham as summary judgment in a shareholder lawsuit that alleged Mr. Scrushy was unjustly enriched through bonuses he received from 1997 to 2002.

Judge Horn ruled that Mr. Scrushy was not entitled to the payments, which included both regular annual bonuses and those paid if the company met performance targets.

The lawsuit alleged that Mr. Scrushy was not entitled to the bonuses because the company was not meeting its annual targets.

From 1996 to March 2003, HealthSouth's value was inflated by more than $2.7 billion through an accounting fraud at the company. Fifteen former HealthSouth executives, including five of the company's chief financial officers, pleaded guilty to criminal charges in connection with the fraud.

Mr. Scrushy was acquitted last June by a jury in Birmingham of federal criminal charges that he took part in the scheme.

Judge Horn said in his ruling that Mr. Scrushy was unjustly awarded the bonuses regardless of whether he participated in the fraudulent activities or even if he knew about them.

"Knowledge is immaterial under the law of unjust enrichment," the judge wrote.

"Scrushy was unjustly enriched by these payments to the detriment of HealthSouth," Judge Horn added. "And to allow Scrushy to retain the benefit of these payments would be unconscionable."

Kile Turner, a lawyer for Mr. Scrushy, said he would appeal the ruling.

"We believe the ruling is in error in that no state or federal court in the United States has ever made a finding on the basis cited in this case," Mr. Turner said. "We will appeal the entire matter to the Alabama Supreme Court and we are confident that it will be reversed."

The lawsuit was filed in August 2002 by a shareholder, Wade Tucker, before the fraud at HealthSouth became public. The suit was consolidated with other shareholder suits after a federal investigation exposed the fraud in 2003.

"It would be like if somebody was overpaid on their paycheck $50,000 instead of $5,000 - they would have to return that money," said John Q. Somerville, an attorney for Mr. Tucker. "It really is no different than that. Scrushy's bonuses were tied to the performance of the company."

If Judge Horn's decision stands, Mr. Scrushy would have to pay the sum of his annual bonuses and target bonus back to HealthSouth.

"The money goes to the company," Mr. Somerville said. "We are delighted with the result that will return the money to the company and hence the shareholders."

In his ruling Judge Horn cited as a precedent an earlier case against Mr. Scrushy. In that case, concluded in August, a Delaware Chancery Court ordered Mr. Scrushy to pay HealthSouth $17 million after the court found he repaid an executive loan with inflated stock.



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