SEC Violated Scrushy’s Rights in Its Investigation, Judge Says

A federal judge who dismissed perjury charges against HealthSouth Corp. founder Richard Scrushy said she did so because the Securities and Exchange Commission engaged in “cloak and dagger activities” that violated his rights.

U.S. District Judge Karon Bowdre in Birmingham, Ala., ruled that the SEC and Justice Department prosecutors improperly merged their civil and criminal investigations of HealthSouth’s accounting on March 12, 2003. Two days later, SEC accountant Neal Seiden interviewed Scrushy, accused of directing a $2.7-billion fraud.

Bowdre late Tuesday dismissed three of 58 criminal charges after finding that Seiden should have told Scrushy he was a target of a criminal probe. Bowdre said Seiden knew that two former finance chiefs had told prosecutors about a massive fraud at the company.

“Our justice system cannot function properly in the face of such cloak and dagger activity by those charged with upholding the integrity of the justice system,” Bowdre said in her ruling.

Prosecutors alleged that Scrushy, 52, lied when he told Seiden that he signed accurate financial statements and denied ordering subordinates to change HealthSouth results.

On Wednesday, a government expert testified that Scrushy bought cars, planes and yachts with money he made during the years of alleged fraud at the rehabilitation chain. Scrushy also purchased real estate, jewelry, art, antiques, land and other personal items, said William Bavis, a consultant who analyzed Scrushy’s personal finances and accounts for the government.

Scrushy is accused of conspiracy, securities fraud, mail fraud, wire fraud, obstruction of justice and violating the Sarbanes-Oxley Act, which bans certifying false financial statements. He denied wrongdoing.