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Originally published Tuesday, July 5, 2005 at 12:00 AM

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Jury still out on "I didn't know" defense

Perhaps the biggest surprise in Richard Scrushy's acquittal last week in the $2.7 billion accounting fraud at HealthSouth was that the jury...

The Associated Press

NEW YORK — Perhaps the biggest surprise in Richard Scrushy's acquittal last week in the $2.7 billion accounting fraud at HealthSouth was that the jury believed his "I didn't know even though I was the CEO" defense.

Just months ago, it seemed executives could no longer plead ignorance and get away with it, a view that came after former WorldCom Chief Executive Bernard Ebbers tried that tactic but was still convicted of being part of a conspiracy that cooked his company's books.

Scrushy's verdict seems to reopen the possibility that executives can argue they didn't know about massive wrongdoing even though they were at the helm. That's something the public may find hard to believe, but at least in this case, the jury accepted it.

The profiles of Ebbers and Scrushy are remarkably similar. They have humble roots, became corporate superstars, then had their reputations tarnished by allegations of financial fraud at the companies they built.

The cases against them also had many things in common, with prosecutors alleging the CEOs were micromanagers who masterminded the accounting fraud. To back that up, they put on the stand former executives, including finance chiefs who had pleaded guilty to avoid trial in their own cases.

Both Scrushy and Ebbers defended themselves by saying they weren't aware of wrongdoing and blamed the troubles on rogue subordinates with severe personal problems.

Those arguments worked for Scrushy, 52, who was acquitted June 28 on the 36 criminal charges he faced, including conspiracy, securities fraud, mail fraud and a single charge under the Sarbanes-Oxley corporate-reform act.

But the jury didn't buy Ebbers' defense. He was found guilty in March of fraud, conspiracy and making false regulatory filings in WorldCom's $11 billion accounting scandal that sank the company three years ago. Ebbers, 63, faces up to 85 years in prison when sentenced this summer.

"This shows that when you go after a CEO, they can put forth the best possible presumption of innocence, and there are times that defense will work," said Joshua Newberg, an associate professor of law and business ethics at the Robert H. Smith School of Business at the University of Maryland. "You don't get to be a CEO without understanding the ability to charm."

The different outcomes may have to do with where the trials were held and whether the executives took the stand.

In the WorldCom case, the New York City trial venue was far from the company's former Clinton, Miss., headquarters. The jurors in New York didn't have the same emotional or sympathetic ties to the company or to Ebbers that people living in Mississippi might have had.

Location is what helped Scrushy sell his defense. The trial was held on HealthSouth's home turf of Birmingham, Ala., where Scrushy had a solid base of support largely through his religious affiliations and community activism.

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Ebbers also took the stand in his trial. Scrushy did not, which left jurors with only what the government presented to form their decision on his involvement in the HealthSouth fraud.

Listening to the jurors' comments after each verdict showed how much those factors mattered. In the WorldCom case, they said that it was hard to believe Ebbers didn't know what was going on.

HealthSouth jurors seemed more willing to accept that there was reasonable doubt about Scrushy's involvement. As one juror said after the verdict: "This is a company he built. Why would he want to destroy it?"

Who knows if executives accused of wrongdoing in the future can use that "I didn't know" defense and win. But there is no doubt the Scrushy case will be used as a blueprint for others preparing to go to trial.

The first to do that will surely be Enron's Ken Lay, chairman of the energy giant when its fraudulent accounting led to the company's collapse in December 2001. He is expected to go to trial next year in the company's hometown of Houston — something that some trial-watchers think may hurt him given the significant losses in jobs and wealth that hit the city as a result of Enron's demise.

"Scrushy does not have anywhere near the profile or visibility of Ken Lay ... and remember Enron went down with a huge crash. It was the first big corporate scandal" in recent history, said Robert Howell, a professor of business administration at Dartmouth College's Tuck School of Business.

But, as he points out, the prosecutors still must put forth a strong enough case that will make it "hard for the jury to believe Ken Lay's defense."

Lay has publicly stated he knew nothing about the fraud. Sound familiar?

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