Martin L. Grass, Rite Aid Corp.'s former chief executive, is expected to plead guilty today in federal court and avoid a lengthy trial on charges that he and key aides conspired to cheat the company and investors in a $1.6 billion fraud scheme.
Grass faces 37 criminal charges, and the extent of his pleadings and whatever sentence he might receive are likely to be seen as important indications of how serious the government will be in its announced crackdown on white collar crime.
Prosecutors would not specify yesterday the charges to which Grass is to plead guilty, noting that the plea agreement had not been filed.
The alleged fraud at Rite Aid in the late 1990s took root in a culture of deceit, prosecutors say, which forced the drugstore giant in 2000 to reduce its reported profits by $1.6 billion. At the time, it was the biggest earnings restatement ever for a U.S. company.
The retailer's financial crisis, which brought the company to the brink of bankruptcy and erased more than 90 percent of shareholder value, foreshadowed even larger cases of corporate financial fraud at companies such as Enron Corp. and WorldCom Inc., which in July last year disclosed nearly $4 billion in irregular accounting to boost profits.
In June last year, Grass and other Rite Aid executives were charged by a federal grand jury in Harrisburg, Pa., with 37 counts of conspiracy, securities fraud, mail fraud, wire fraud and making false statements to the Securities and Exchange Commission.
Grass, 49, who led the drugstore chain from 1995 through 1999, and the others were charged with artificially boosting the retailer's profits and rewarding themselves with millions of dollars in bonuses.
The chief executive's jeopardy in the case appeared to grow steadily as other defendants pleaded guilty to lesser charges and agreed to cooperate with prosecutors.
Timothy J. Noonan, Rite Aid's former president and chief operating officer, who was also charged as a co-conspirator, pleaded guilty in July to one count of concealing a felony after cooperating with prosecutors during part of their two-year investigation.
Then, on June 5, four days before his trial was scheduled to start, former Rite Aid Chief Financial Officer Franklyn M. Bergonzi, pleaded guilty to one count of conspiracy and agreed to testify against Grass in exchange for a reduction in charges.
Bergonzi also agreed to testify against a third co-defendant, Franklin C. Brown, former Rite Aid vice chairman and general counsel. The defense then asked for and got a trial postponement.
Brown is not expected to enter a guilty plea today, said Martin Carlson, an assistant U.S. attorney on the prosecution team.
Bergonzi "was the CFO ... and can probably implicate others," said John C. Coffee, Jr., director of the center on corporate governance at Columbia Law School.
"They've gotten a little surprise finding one of the principal wrongdoers in the position of being a cooperating witness."
Grass' attorney, William H. Jeffress, did not return phone calls yesterday. Brown's attorney, Reid H. Weingarten, also did not return calls.
Grass will probably be sentenced at a later date, Carlson said.
In a court order filed yesterday, U.S. District Judge Sylvia H. Rambo set a change of plea hearing for 9:30 this morning.
Jeffress had said this month that Grass, a former Greenspring Valley resident who now lives in Virginia Beach, Va., is "resigned to being tried. ... He's confident in the outcome."
The SEC and federal prosecutors have promised since a series of major corporate scandals to be much tougher on white collar criminals.
Congress has also taken steps to tighten lax corporate accounting, passing the Sarbanes-Oxley Act, which holds top officers accountable for companies' financial reports, and creating the five-member Public Company Accounting Oversight Board, to set ethics controls.
Last week, a federal judge shocked corporate America by imposing a seven-year sentence on Samuel D. Waksal, the jet-setting founder and former chief executive of ImClone Systems Inc. who pleaded guilty to insider trading.
"The fact that the criminal justice system fell on [Waksal] like Dorothy's house doesn't bode well for people like Grass or [former Enron Chief Financial Officer Andrew S.] Fastow who aren't sympathetic," said Stephen M. Rosoff, professor of criminality at the University of Houston Clear Lake and author of Looting America: Greed, Corruption, Villains and Victims.
Grass would become one of the first former top executives to plead guilty after a series of corporate financial scandals has tainted the corporate world in an age of "sociopathic wealth," Rosoff said.
Columbia's Coffee said, "We have a sudden epidemic of accounting irregularities."
From 1997 to 2002, he noted, 10 percent of publicly listed companies restated their financial statements at least once. "It was a fairly pervasive, fairly systematic breakdown, not just a few bad apples," he said.
Rite Aid's accounting troubles were extreme, he said.