HARRISBURG, Pa. - Rite Aid Corp.'s former chief executive Martin L. Grass pleaded guilty yesterday to two counts of conspiracy - to defraud shareholders and to obstruct justice - in one of the nation's biggest corporate accounting scandals in recent history.
Grass, the son of Rite Aid's founder, agreed in a deal with federal prosecutors to serve up to eight years in prison and pay the government $3.5 million in fines and forfeitures.
If approved by U.S. District Judge Sylvia H. Rambo, the sentence would be the stiffest punishment handed a former CEO for accounting fraud since corporate scandals at Enron, WorldCom and Adelphia began undermining investors' confidence, prosecutors said.
Grass, 49, formerly of the Greenspring Valley in Baltimore County, entered the guilty plea in U.S. District Court in Harrisburg and waived his right to a jury trial.
He was to have gone to trial Monday on 37 counts alleging that he artificially boosted profits and that he rewarded himself and key aides with millions of dollars in bonuses.
As part of the plea deal, Grass, who headed Rite Aid from 1995 to 1999, agreed to cooperate in the government's continuing probe into the scandal, which prompted the company to restate its earnings by $1.6 billion in 2000, erased more than 90 percent of shareholder value and brought one of the nation's leading drugstore chains to the brink of bankruptcy.
"There came a time when intellect was superseded by greed, lust for power and lust for money," U.S. Attorney Thomas A. Marino said of Grass' role in the scheme.
"We know there was fraud and deception on the part of Mr. Grass to profit from what he was doing," Marino said. "The message we're getting across to every hard-working American who invests their money is that we're serious" about going after white-collar offenders.
Marino, U.S. attorney for the Middle District of Pennsylvania, said it is "very probable" that the investigation, including information from Grass, will lead to others being charged. He declined to comment on the number of indictments he expects or when they might be issued.
Grass is expected to testify against two of his alleged co-conspirators, former Rite Aid vice chairman and general counsel Franklin C. Brown, who is still scheduled to go on trial Monday; and Eric S. Sorkin, Rite Aid's executive vice president of pharmacy services.
Sorkin was charged last summer with one count of obstruction of justice and will be tried separately from Brown.
In a move that may have radically altered plans for Grass' defense, Franklyn M. Bergonzi, 57, Rite Aid's former chief financial officer, pleaded guilty June 5 to conspiring with others in accounting fraud, just days before he was scheduled to stand trial June 9 with Grass and Brown. Bergonzi could face up to five years in prison, prosecutors said.
Grass smiled and appeared relaxed as he entered the courtroom yesterday to change his not-guilty plea. After the hearing, he declined to talk to reporters but stood alongside as his attorney William H. Jeffress spoke on his behalf.
"Martin has admitted he violated the law, and he's accepted responsibility for that. He faces a stiff penalty for that," Jeffress said. "He did not - and nobody has ever accused him of - lining his pockets at the expense of Rite Aid. Martin did admit he violated the law, and it's a sad day for him."
In contrast to some other high-profile corporate fraud cases, Grass never sold any stock or exercised any options, Jeffress said.
Rambo accepted Grass' plea but must decide whether to accept the terms of his deal with prosecutors. Grass is not expected to be sentenced for at least three months. The government could recommend a prison term of less than eight years based on his help in the investigation.
Grass was charged last summer with 37 counts of conspiracy, securities fraud, mail fraud, wire fraud and false statements to the Securities and Exchange Commission. He pleaded guilty yesterday to conspiracy to defraud and conspiracy to obstruct justice, which each carries a maximum penalty of five years in prison. The plea agreement calls for the government to reduce the maximum penalty to four years each and dismiss the remaining charges.
The conspiracy to defraud count covers 13 separate subschemes, said Assistant U.S. Attorney Kim Douglas Daniel.
In one such scheme, Grass admitted to backdating documents and letters to alter Rite Aid's long-term incentive plan in an unsuccessful attempt to double the number of shares awarded to him, Brown and Bergonzi. The scheme would have resulted in a $36.5 million financial gain for Grass, according to the indictment.
Additionally, Grass has admitted to covering up a deal in which he and Brown wired $2.6 million from a Rite Aid account in New York to CCA Associates Inc. to purchase 83 acres in York County, Pa., and pay off CCA debts. CCA is part of Harrison & Grass, a commercial real estate business that is owned by Grass and his brother-in-law Tim Harrison.