Secret tapes in Rite Aid investigation defended

U.S. prosecutors say use of recordings is ethical

October 15, 2002|By BLOOMBERG NEWS

HARRISBURG, Pa. - Federal prosecutors have denied allegations that they broke ethics rules by using Timothy Noonan, former president of Rite Aid Corp., to make secret recordings of two executives accused of accounting fraud.

Noonan taped former Chief Executive Officer Martin Grass and ex-Chief Counsel Franklin Brown last year discussing the investigation of the third-largest drugstore chain. Grass, Brown and former Chief Financial Officer Frank Bergonzi were indicted in June on charges of obstructing justice and of an accounting fraud that led Rite Aid to restate $1.6 billion in profits.

Grass and Brown have asked U.S. District Judge Yvette Kane in Harrisburg to suppress the tapes, arguing that Assistant U.S. Attorney Kim Daniel used Noonan as a surrogate to interview the defendants about issues under investigation. Kane sealed transcripts of the tapes at the request of Brown and Grass.

The two defendants say prosecutors unethically used Noonan as a surrogate to question them when lawyers for both men opposed such interviews. Prosecutors said in court papers that informants are permitted to tape-record people obstructing justice even if they have hired lawyers.

"In these tape-recorded conversations, Grass and Brown provide graphic evidence of an active, ongoing scheme to obstruct justice," First Assistant U.S. Attorney Martin Carlson said in court papers filed Oct. 4. "Even though Grass and Brown were represented by counsel, no ethics violation was occasioned by the government's surreptitious recording of their conversations."

Carlson said Grass and Brown cannot claim that their having lawyers protected them before the indictment because Pennsylvania ethics rules don't allow attorneys to further an ongoing crime or fraud.

Noonan, 60, resigned in February 2000. He had been one of Rite Aid's top four officers, with Grass, Brown and Bergonzi.

Over the next year, Noonan met with Brown and Bergonzi to thwart the company's internal investigation, and federal criminal and civil investigations that began in December 1999, Carlson said.

Noonan, in a bid for leniency at sentencing, agreed in March last year to help prosecutors. He pleaded guilty July 10 to concealing the fraud from Rite Aid internal investigators. He taped five meetings with Brown and one with Brown and Grass, Carlson said.

Those sessions, which began March 13 in a restaurant in Mechanicsburg, Pa., were "mere extensions of Grass and Brown's prior illegal conduct," Carlson said.

The tapes "reveal the men discussed the submission of false information to the FBI, the fabrication of contrived explanations for certain events, the back-dating of documents" and the destruction of the computer that generated them, Carlson said.

William Jeffress, an attorney for Grass, did not return calls seeking comment. Brown's attorney, Reid Weingarten, said he would respond in court papers to Carlson's filing.

Prosecutors allege that Rite Aid boosted its share price 306 percent from 1995 through 1999 by overstating income and understating expenses. They say Rite Aid officers lied about company finances to the U.S. Securities and Exchange Commission, bank lenders, former auditors KPMG LLP and internal investigators.

The SEC called the case one of the most egregious accounting frauds ever.

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