The early 2000s was a time period filled with corporate scandals. Companies such as HealthSouth, Tyco, Worldcom, Enron, and Freddie Mac all emerged as breaking fraud stories for newspapers worldwide. Amidst the corporate chaos of this time, I would like to talk about HealthSouth’s story. One that I find incredibly interesting because of the punishment, or lack there of, given to the executives.
HealthSouth’s CEO, Richard Scrushy, grew up in the depressed town of Selma, Alabama. Post-high school, Scrushy followed many of his peers and lived in a trailer park, working as a day laborer. This lifestyle continued until, one day, he decided to go to college. Scrushy graduated from the University of Alabama-Birmingham with a degree in respiratory therapy. This was the beginning of his road to sucess.
In Scrushy’s mid-twenties, he met a man by the name of Aaron Beam while working at a large healthcare company. Together, they came up with the idea of creating a company that would move hospital rehabilitation services to outpatient facilities. This company came to be named HealthSouth.
In the mid-1990’s, HealthSouth because a Wall Street star. The company had met, or exceeded, Wall Street’s expectations for more than 40 quarters in a row. The company’s success led to Scrushy’s becoming the nation’s third highest paid CEO in 1997 (making more than $100 million per year).
Although Scrushy was seen by outsiders as an intelligent and charismatic leader, things were different on the inside. According to Beam, Scrushy’s public demeanor was just a show. Instead of being the awe-inspiring CEO of HealthSouth that the public saw him as, Scrushy was a tyrant. He created such a fearful work environment for HealthSouth’s employees that they all immediately agreed with whatever he said, even the CFO Aaron Beam. This was the beginning of HealthSouth’s downfall.
In the second quarter of 1996, HealthSouth’s growth had slowed to the point that Wall Street’s expectations could not be met. Instead of admitting to a down-year, Scrushy ordered Beam to inflate earnings numbers to meet stockholder expectations. Over the next five years, HealthSouth’s fraudulent activity had grown to $2.4 billion. While Beam thought there was no end in sight, HealthSouth’s former CFO, Weston, blew the whistle.
In addition to Weston’s whistle-blowing, the SEC’s suspicions continued to grow as Scrushy sold approximately $75 million in stock a day before the company posted a huge loss. After the company was found guilty of cooking the books by the SEC, Scrushy and the past five CFOs were sent to court. While Scrushy was acquitted of all 36 counts of accounting fraud, the five CFOs all served prison time after being found guilty of accounting fraud. Although Scrushy walked away from this mess, he was sentenced to seven years in federal prison for bribing the governor of Alabama.
It truly shocks me that Scrushy would be acquitted of all 36 counts of accounting fraud. CEOs of other companies who had committed other similar felonies all served prison sentences for being associated with the corporation’s fraud. Enron’s Jeff Skilling, WorldCom’s Bernard Ebbers, and Tyco’s Dennis Kozlowski were all sentenced to seriously long prison sentences. My question for you is whether or not you think an executive’s punishment depends on the state they were tried in? Or is there some other factor involved?