The Scrushy Defense

Let's see. Health-care service provider HealthSouth (OTC BB: HLSH) currently trades on the Pink Sheets at around $5.80 per share. Over the past few years, 15 executives of the company have pleaded guilty to an accounting scandal involving $2.7 billion in restatements of imaginary profits. Thousands of employees lost jobs in the implosion that followed.

And a jury acquits former CEO Richard Scrushy on all 36 criminal charges, which included securities fraud, conspiracy, and even a charge under Sarbanes-Oxley. It's certainly a strange outcome, given that juries have convicted other CEOs, such as Tyco's (NYSE: TYC  ) L. Dennis Kozlowski and WorldCom's Bernard Ebbers, for their hand in corporate scandals.

But Scrushy vows that he knew nothing about the fraud at HealthSouth. Rather, he is convinced it was an elaborate scheme concocted by five of the company's CFOs.

Of course, prosecutors thought differently. At the trial, they had the five CFOs as witnesses, and all of them said Scrushy was the mastermind. The prosecution even possessed secretly made audio recordings of Scrushy that suggested he knew about the con.

While Scrushy was effectively deemed ignorant of the goings-on at HealthSouth, he certainly benefited financially from his stint as CEO. Hey, he was able to spend $25 million on his defense.

And it was money well spent. His attorneys did a masterful job of attacking the credibility of the witnesses. For example, there were allegations of tax evasion, adultery, prescription-drug use, and alcoholism. What's more, the attorneys disclosed that the five CFOs had pleaded guilty to crimes at HealthSouth but suffered light punishment, such as home detention and probation.

And as for the covert recordings, Scrushy's attorneys made a case that they were ambiguous.

Oh, it didn't hurt that the trial was in Scrushy's hometown of Birmingham, Ala., where he staged an aggressive PR campaign. He had a daily cable show and frequently gave sermons at various ministries.

Interestingly enough, this is the first criminal case based on a Sarbanes-Oxley charge, in that Scrushy certified the financial statements of HealthSouth. The irony is that Congress intended for Sarbanes-Oxley to make it harder for CEOs to claim ignorance.

Despite the law, the fact remains that prosecutors need to make a strong case. And that's no easy feat when dealing with complex financial matters, or when Scrushy says he knew little about the company's finances.

We can hope that prosecutors will learn from this case -- especially in light of the upcoming trial with Jeffrey Skilling and Ken Lay from Enron. But one thing is certain: Expect those two to vigorously take the Scrushy defense.

Fool contributor Tom Taulli does not own shares mentioned in this article.