Health south, one of the US's largest post-acute healthcare services providers was involved in an accounting scandal because of its CEO and founder had been directing employees to grossly exaggerate (in some fiscal years it was exaggerated by 4700%) the company's earnings to meet stockholder expectations. This was in direct violation of the Sarbanes-Oxley Act which prevents corporations from scamming their shareholders. Just before the shares actually went down, the CEO, Richard Scrushy sold $75 million of stock which got the SEC's (Security Exchange Commission) attention.
He was indicted on 85 counts of money laundering, conspiracy, securities fraud, and mail fraud, though he was only charged with 36 counts. Despite multiple chief executives in his company testifying against him, there was no material evidence to prove Scrushy had been involved in the fraudulent accounting.
In Court, Scrushy's lawyer argued the Idiot Defense. This is a legal strategy whereby the defendant claims innocence by virtue of ignorance to facts which they should be aware of. In this case, Scrushy claimed all the wrongdoing was done by others (which there was no evidence to the contrary to, save people's words) and done so without his knowledge or consent. He said his skill was in valuation and deal-making, not recognizing fraudulent accounting practices which would be needed to realize what was going on.
While many other CEOs have tried this defense, Scrushy is the first to actually be acquitted, although some do attribute it to there not being any court-admissible, hard evidence against him.
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I think it's really interesting that Scrushy was acquitted, as he had to be intelligent enough to come up with and pull off the scam. Additionally, those hired as CEOs must be intelligent since their role is essentially running an entire company. Cases like these are what allows for the trust to be lost in the justice system because when all the signs point to guilt and someone's acquitted, it doesn't seem like the system is working.
ReplyDeleteI agree with the previous comment that the CEO has a duty to know what is going on, even if he actually has been ignoring important issues, like odd accounting going on. It's the same concept as "ignorance of the law is not defense"; ignorance of the facts is not a defense if your job places a duty on you to know certain important facts. I don't think it should matter that there was no evidence in court to prove that the CEO actually knew what was happening with the accounting fraud. His core responsibility as CEO is to be following important financial issues in the company. He runs the company so he is responsible at a high level - not for every little thing but for big financial and accounting issues.
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