Rite Aid 4 plead not guilty

Grass, Brown, Bergonzi and Sorkin are arraigned in federal court in Pa.

Accounting scandal

They're accused of hiding fraud to enrich themselves

July 12, 2002|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

HARRISBURG, Pa. - Wearing a bright red tie and an ash-gray pin-striped suit, Martin L. Grass, former chairman and chief executive of Rite Aid Corp., strode into U.S. District Court here yesterday with his attorneys and pleaded not guilty to charges in connection with an accounting scandal that forced one of the largest restatements in corporate history.

Two other former Rite Aid executives and a suspended one also indicted last month joined Grass yesterday in a row in front of Judge Yvette Kane to plead not guilty to similar charges in an arraignment that lasted half an hour.

Grass, 47, who lives in Virginia Beach, Va., former Vice Chairman Franklin Brown and former Chief Financial Officer Franklyn M. Bergonzi face the bulk of the charges, including conspiracy to defraud, making false statements to the Securities and Exchange Commission, obstruction of justice, and fraud in connection with the purchase or sale of securities.

Most of the 37 counts on which Grass and his former colleagues were indicted carry maximum sentences of five years in prison and a $250,000 fine. The most serious charges on which Grass and Brown were indicted - the charges of securities purchase or sales fraud and obstruction of a grand jury proceeding - carry maximum terms of 10 years in prison and a $1 million fine.

Grass was accompanied only by his lawyers on his way to and from court yesterday morning. He declined to answer questions, saying only, "I plan to do all my talking in the courtroom."

Eric S. Sorkin, 53, suspended from his position as executive vice president for pharmacy services, pleaded not guilty to conspiring to obstruct justice and making false declarations to a grand jury. Each charge carries a maximum penalty of five years in prison and a $250,000 fine. Rite Aid has placed him on administrative leave without pay, a company spokeswoman said.

After the arraignment yesterday, Kim Douglas Daniel, the assistant U.S. attorney handling the case, said the defendants face enough counts to make lengthy prison sentences possible. "They could be looking at 20 or 30 years in prison potentially," he said.

A combined trial for the defendants is set for Sept. 9, but Daniel said that date probably will be pushed back. All four defendants were released on their own recognizance after they agreed to turn over their passports to the court.

Douglas said he requested their passports not because he believed they were flight risks but because "with charges as serious as this, it would be irresponsible to not require someone to turn in their passport."

Civil suit

The SEC has filed a civil lawsuit against Grass, Bergonzi and Brown in the Middle District of Pennsylvania. They have not yet responded to the complaint, an SEC spokeswoman said yesterday.

The government's case against the three former executives was bolstered by Timothy J. Noonan, Rite Aid's former president and chief operations officer, who cooperated with prosecutors in the two-year investigation.

As part of a plea agreement signed in November, Noonan agreed to plead guilty to a single felony count of withholding information from the company's internal investigators. He pleaded guilty Wednesday and faces up to three years in prison and a $250,000 fine.

In the 37-count indictment June 21, federal prosecutors alleged that Grass, Brown and Bergonzi's portrayal of Rite Aid as a profitable company was "a ruse and a mirage" that involved extensive accounting fraud, deliberate falsification of financial statements and intentionally false SEC filings.

Focus on bonuses

Prosecutors alleged that Grass and the other top executives enriched themselves through bonuses they received that were tied to the company's performance. Grass drew a $1 million annual salary from 1996 to 1999 and received bonuses totaling nearly $2.4 million, the indictment stated.

Grass and the other executives cheated Rite Aid's vendors by artificially inflating the number of damaged and outdated goods, allowing them to claim $53 million in bogus credits as income over a four-year period, prosecutors alleged.

Other schemes that allegedly defrauded the company involved an undisclosed transfer of $2.6 million in Rite Aid money to a real estate development company co-owned by Grass and his brother-in-law Tim Harrison.

Bergonzi, the former CFO, is accused of coordinated the accounting fraud and instructed less senior employees in Rite Aid's accounting department to make unsupported entries in the company's books and records.

Grass and the other top executives left the company soon after the accounting irregularities surfaced in October 1999. The new management worked with auditors to correct the company's books and wipe away $1.6 billion in reported profit, leaving the company on the verge of bankruptcy.

Camp Hill, Pa.-based Rite Aid, with nearly 3,500 stores across the country, remains heavily in debt from the times in the 1990s when Grass bought other companies and opened hundreds of stores under an aggressive expansion plan.

Shares have plummeted

The company's shares, which had traded at more than $50 before the accounting scandal broke, lost 8 cents yesterday to close at $2.38. Some analysts say that Rite Aid - which has sharply curtailed growth plans and is focused on paying down its debt - is on the road to recovery.

It continues to be a long tumble for Grass, who took over Rite Aid's helm from his father, Alex Grass, in 1995 and was viewed by Wall Street as a rising star.

He almost immediately embarked on an aggressive growth campaign that would transform the company from a regional player into a national one. As head of a drugstore chain that seemed to be making all the right moves, Grass soon had Wall Street on his side.

Before the accounting scandal broke in late 1999, one of the biggest public controversies Grass had endured was a protracted dispute with neighbors in Green Spring Valley, who objected to the noisy helicopter he used to commute to Rite Aid's headquarters in Camp Hill, near Harrisburg.

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