Analysis: Scrushy acquittal may have lessons for Rajaratnam

NEW YORK Thu Mar 24, 2011 9:50am EDT

Lloyd Blankfein, (L) Goldman Sachs Group Inc Chief Executive, is seen in this courtroom sketch testifying in Manhattan Federal Court as Raj Rajaratnam looks on during his insider trading case in New York, March 23, 2011. REUTERS/Jane Rosenberg

Lloyd Blankfein, (L) Goldman Sachs Group Inc Chief Executive, is seen in this courtroom sketch testifying in Manhattan Federal Court as Raj Rajaratnam looks on during his insider trading case in New York, March 23, 2011.

Credit: Reuters/Jane Rosenberg

NEW YORK (Reuters) - A high-profile white-collar defendant. A parade of former associates testifying against him. Secretly recorded conversations played for the jury.

This isn't the insider trading trial of one-time billionaire money manager Raj Rajaratnam in New York. It was the case against ex-HealthSouth Corp (HLS.N) CEO Richard Scrushy, whose 2005 acquittal in an accounting fraud scandal in Alabama shows that even seemingly powerful government cases can go off track.

Like Rajaratnam, Scrushy spent heavily in assembling a criminal defense team to fight for his liberty.

Also like Rajaratnam, he was up against prosecutors who brought in others who had pleaded guilty to testify. One former HealthSouth finance chief had worn an FBI wire and covertly recorded his talks with Scrushy to assist the government.

Scrushy is now in prison in a separate political bribery case. But his acquittal on charges of directing a $2.7 billion accounting scheme at HealthSouth could be a source of inspiration for Galleon Group hedge fund founder Rajaratnam in the biggest Wall Street insider trading case in a generation.

"In these types of situations you can throw a lot of resources at it if your client can afford it," said James Jenkins, one of Scrushy's lawyers. "Trials are games of inches sometimes. Sometimes the little things can build up to make a big difference."

While other lawyers were in a Birmingham, Alabama, courtroom for Scrushy's trial, Jenkins, of law firm Maloy Jenkins Parker, was 150 miles away in Atlanta. There, he handled research for the trial team and reviewed court transcripts each night to look for holes in the prosecution's case.

ATTORNEYS HUDDLED IN COURTROOM

Rajaratnam, too, has help inside and outside of court at a trial now in its third week and expected to last two months.

He has half a dozen lawyers and assistants in the courtroom, huddled around a wooden table scattered with documents and laptops. They have been allowed to send real-time transcripts for other lawyers to review.

The team is led by veteran defense attorney John Dowd and other top lawyers at law firm Akin Gump Strauss Hauer & Feld LLP. Dowd spokesman Jim McCarthy declined to comment on trial strategies, resources or the cost to Rajaratnam.

Rich defendants such as Scrushy and Rajaratnam can hire the best legal team possible. Still, money goes only so far. Wealthy homemaking entrepreneur Martha Stewart, for example, was convicted in 2004 of lying to investigators about a stock sale and served five months in prison.

Experienced defense lawyers know the formidable arsenal the Justice Department brings to a criminal prosecution.

The government can offer witnesses immunity from prosecution or the chance of a lighter sentence, something "no wealthy defendant, no matter his resources, can offer," said Adam Hoffinger, a former federal prosecutor who is now a partner at law firm Morrison Foerster in Washington.

A top-notch defense team does not come cheap. The most sought-after white-collar lawyers can bill anywhere from $750 to $1,100 an hour.

Legal experts say a good defense strategy for Rajaratnam is to undermine the credibility of witnesses who have pleaded guilty and are testifying in hopes of a judge's leniency.

Already, Dowd has been on the attack, accusing star prosecution witness and former McKinsey & Co partner Anil Kumar of concocting a "monstrous lie" and trying to pin misdeeds on Rajaratnam to avoid additional charges.

That was the strategy in the Scrushy trial, where about 15 former HealthSouth executives pleaded guilty. Scrushy contended he was duped by underlings and had no knowledge of the fraud.

The defense cast doubt on the testimony of five ex-chief financial officers called to the witness stand by prosecutors. A Scrushy lawyer dubbed them "a pack of rodents" in closing arguments. After lengthy deliberations, Scrushy was acquitted. He was later ordered to pay a $2.9 billion judgment on behalf of HealthSouth shareholders in a civil lawsuit.

There are some key differences between the cases.

Rajaratnam is on trial in New York, where prosecutors have more experience in big financial cases. Rajaratnam, well known to the business community in his native Sri Lanka, is unknown to most New Yorkers. He has kept his family life private.

Scrushy, in contrast, was tried before a hometown jury in Birmingham, where he supported many charitable causes. The ex-HealthSouth CEO, who is white, had joined a predominantly black church around the time of his indictment in what some critics called an attempt to influence the potential jury pool. He and his wife hosted a religious program on local TV.

Lawyer Jenkins said another difference is that while Scrushy's case featured evidence from an ex-company executive who wore an FBI wire, Rajaratnam's trial involves hundreds of audio recordings of phone taps the prosecution could play.

"To deal with a wiretap just takes incredible resources in terms of time and people to do it well," Jenkins said.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

(Additional reporting by Grant McCool; editing by John Wallace)