Four indicted in fraud case at Rite Aid
By Peter Jackson
Associated Press
HARRISBURG, Pa. — Three former Rite Aid Corp. executives were indicted yesterday for allegedly falsifying the books in a scheme that inflated the drugstore chain's profits by $1.6 billion and forced the biggest restatement of corporate earnings in U.S. history.
The 37-count federal indictment also accused a current executive at the nation's third-largest drugstore chain of lying to a grand jury.
"The charges ... reveal a disturbing picture of dishonesty and misconduct at the highest level of a major corporation," said Wayne M. Carlin, Northeast regional director of the Securities and Exchange Commission.
"Rite Aid's former senior management employed an extensive bag of tricks to manipulate the company's reported earnings and defraud its investors."
Martin L. Grass, 47, of Virginia Beach, Va., the former chairman and chief executive; Franklin Brown, 74, of Harrisburg, the former chief counsel and vice chairman; and Franklyn Bergonzi, 57, of Hummelstown, Pa., a former executive vice president and chief financial officer, face charges including conspiracy to defraud, fraud in connection with the purchase or sale of securities and making false statements to the Securities and Exchange Commission. Grass and Brown also are accused of tampering with witnesses and obstructing various investigations.
Eric S. Sorkin, 53, of Mechanicsburg, Pa., executive vice president for pharmacy services, was charged with conspiracy to obstruct justice and making false statements to a grand jury. Sorkin was suspended until further notice yesterday morning, when the company found out about the indictment, a spokeswoman said.
Also yesterday, the SEC said it filed separate civil lawsuits seeking penalties and the repayment of more than $4 million in annual bonuses by Grass, Bergonzi and Brown, who all left Rite Aid in 1999 and 2000, and an order barring any of them from serving as an officer or director of a public company.
Rite Aid's July 2000 earnings restatement reduced its earnings in the late 1990s by $1.6 billion.
Among the allegations:
• Grass and Brown agreed to pay more than $11 million to settle a lawsuit filed by a former executive, to silence him after he threatened to tell news media about an alleged scheme in which Rite Aid inflated the value of damaged and outdated merchandise. Prosecutors say the scheme enabled Rite Aid to claim more than $50 million in credits from vendors.
• In pledging stock from then-subsidiary PCS Health Systems Inc. for an interim line of credit in 1999, Grass directed another officer to fabricate minutes of a meeting of its Health Committee.
Grass said in a statement that he had not reviewed the indictment but that he did not break any laws.
Two lawyers representing Brown said the indictment mischaracterizes acts that were taken to benefit the company.
A telephone message left at Bergonzi's home was not returned. Sorkin hung up on a reporter who reached him at home.
The four are to appear July 16 in federal court in Harrisburg.
Rite Aid, which Grass' father founded more than 40 years ago, operates 3,600 stores in 30 states and the District of Columbia. It reported sales of nearly $15 billion in fiscal 2001.
Rite Aid grew rapidly during the late 1990s. Fortune magazine counted it among "America's Most Admired Companies" in 1998 and its stock hit a high of $50.94 a share in 1999. But accounting irregularities surfaced that year, and Rite Aid has been struggling ever since. In trading yesterday, Rite Aid shares closed at $2.69 on the New York Stock Exchange.
Rite Aid spokeswoman Karen Rugen said the company has strengthened its financial controls. "We're a very different company and a much stronger company than we were two years ago."
