Ex-CEO Loses Challenge to HealthSouth Settlement

(CN) - The 11th Circuit on Wednesday rejected former HealthSouth CEO Richard Scrushy's challenge of the $445 million settlement of securities fraud class actions against the health rehabilitation company.

In 2003, HealthSouth acknowledged that its previous financial statements had substantially overstated its income and assets, opening a floodgate of shareholder class actions. Investors pegged Scrushy as the mastermind of the fraud.

HealthSouth agreed to a partial settlement in 2006, which required HealthSouth and its insurers to pay $445 million to certain investors.

Although Scrushy did not participate in the settlement, he urged the court to reject portions of the deal. He claimed the settlement barred his potential claim against HealthSouth for reimbursement of any settlement payments he might make to the underlying plaintiffs. He said the "bar order" also prevented him from recovering legal costs, including attorney fees, that might arise from similar actions.

The bar order includes a "judgment credit," which would credit Scrushy against any future judgment against him. That credit is the greater of HealthSouth's proportionate liability or $445 million, the amount actually paid.

Scrushy argued that the credit judgment wouldn't apply to possible settlements, because it doesn't come into play until a court rules against him.

"We reject this argument as wholly without merit," Judge Anderson wrote for the three-judge panel, adding that "the overall compensation to Scrushy was adequate."

The Atlanta-based federal appeals court acknowledged that an advance of attorney fees could help innocent officers prove their innocence, but the judges gave more weight to the parties' interest in a settlement, particularly given the former executive's alleged involvement in the fraud.

"Scrushy proffered or adduced no evidence in the district court indicating that he was merely an innocent bystander with respect to the violations," Anderson wrote. "Nor did he adduce any evidence of his inability to fund a full and adequate defense to any claims against him by the underlying plaintiffs."

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