Judge to allow secret tapes in trial of ex-Rite Aid officials

Former president taped 2 at prosecution's request

January 14, 2003|By BLOOMBERG NEWS

HARRISBURG, Pa. - Federal prosecutors acted legally in using Rite Aid Corp.'s former president to make secret recordings of two other executives of the No. 3 drugstore chain, a judge ruled yesterday.

Timothy J. Noonan, taped former Chief Executive Officer Martin L. Grass and former Chief Counsel Franklin Brown in 2001 while they were discussing investigations into the company's accounting.

Grass, Brown and former Chief Financial Officer Franklyn M. Bergonzi were indicted in June on charges of obstructing justice and running an accounting fraud that led Rite Aid to restate $1.6 billion in profits.

Yesterday's ruling permits prosecutors to offer the six tapes as evidence when Grass and Brown go on trial June 9. The two former executives had asked U.S. District Judge Sylvia Rambo, who is presiding over the case, to bar the tapes.

Grass and Brown claimed Assistant U.S. Attorney Kim Douglas Daniel unethically used Noonan as a surrogate to question them instead of going through their lawyers.

"AUSA Daniel's conduct was authorized by law and, thus, did not violate the Pennsylvania rules of professional conduct," Rambo ruled in Harrisburg. "Suppression of the Noonan tapes would be unjustified."

An attorney for Grass, William Jeffress Jr., and an attorney for Brown, Reid Weingarten, did not return calls seeking comment.

Rite Aid disclosed in a Dec. 27 filing that it was negotiating a settlement with prosecutors that would result in a civil penalty for the accounting fraud. The company said it has reserved $20 million for any settlement. Prosecutors have told Rite Aid that it would not face criminal proceedings, the company said.

The Securities and Exchange Commission called the accounting fraud at Rite Aid one of the most egregious and filed a civil suit against Grass, Brown, and Bergonzi. In June last year, the SEC issued a cease-and-desist order against the company, barring further securities fraud.

Noonan resigned in February 2000 after serving as one of Rite Aid's top four officers, with Grass, Brown and Bergonzi. Prosecutors said Noonan met over the next year with Brown and Grass to thwart the company's internal investigation, and U.S. criminal and civil probes that began in December 1999.

Noonan, who pleaded guilty and faces up to three years in prison and a $250,000 fine on a single felony count, agreed to cooperate with prosecutors.

He taped five meetings with Brown and one with Brown and Grass, prosecutors said. Noonan pleaded guilty in July to concealing the fraud from Rite Aid internal investigators.

Prosecutors said in court papers that the tapes gave "graphic evidence of an active, ongoing scheme to obstruct justice" by Brown and Grass.

Attorneys for Grass and Brown complained to Rambo that Daniel, the assistant U.S. attorney, had signed a fake letter addressed to Noonan's lawyer detailing topics of interest to prosecutors in the investigation.

Noonan used the letter to trick Brown into discussing a response to prosecutors, defense lawyers argued. The judge ruled that although Daniel's preparation of the letter "involves a certain level of dishonesty," it did not rise to the level of prosecutorial misconduct.

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