Rise And Fall Of Rite Aid Chief

8-year jail term for Grass

Conspiracy: The former Rite Aid CEO is sentenced for his role in a $1.6 billion accounting fraud.

May 28, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

HARRISBURG, Pa. - Martin L. Grass inherited a kingdom. The son of the founder of Rite Aid Corp. presided over the boom years of one of America's top drugstore chains, earning $1 million a year. He lived on a 10-acre estate in Greenspring Valley, hobnobbed with Baltimore's elite in arts and health circles and was featured as a rising star executive in Fortune magazine.

Yesterday, Grass' world of wealth and privilege shattered as a federal judge sentenced the former Rite Aid chief executive to eight years in prison for orchestrating a $1.6 billion accounting fraud and covering it up. The scandal erased nearly 90 percent of shareholder value and almost tipped the retailer into bankruptcy.

Before Judge Sylvia H. Rambo handed down the sentence in U.S. District Court here, Grass apologized to Rite Aid, its stockholders and employees. "For the harm caused to them, I am truly sorry," he said.

In slow, measured sentences, Grass, 50, spoke of how Rite Aid, founded in 1962 by his father as a Scranton, Pa., discount drugstore, had been more than a job. "It was my life," said Grass, who started at Rite Aid in his teens as a stock boy. When he took over as chief executive officer in 1995, launching a plan to expand to the West Coast and to open 3,000 stores and add 50,000 employees, "I was ambitious for the company and ambitious for myself. I wanted to build Rite Aid into a major national drugstore chain. ... I tried to do too much too fast." Saddled with about $5 billion in debt, "when things started to go wrong financially, I did things to hide that fact," Grass said. "Those things were wrong, they were illegal. I did not do it to line my own pockets. I believed in Rite Aid."

Grass, who lives in Boca Raton, Fla., pleaded guilty in June to two counts of conspiracy - to defraud shareholders by inflating earnings and to obstruct U.S. investigations of the three-year accounting fraud. It has been one of the biggest corporate accounting scandals in recent history.

The sentence, which includes a $500,200 fine and three years of supervised release, was less than Grass could have received under federal sentencing guidelines. After Rambo rejected a plea deal that called for up to eight years in prison, Grass reached a new deal that capped his potential sentence at 10 years in prison.

The sentence yesterday reflected credit for help he provided to the government in unraveling the fraud and prosecuting other senior Rite Aid executives. Grass received the longest sentence of the four former Rite Aid executives who have been sentenced. Two others await sentencing.

13 schemes

The web of lies, frauds and cover-ups at Rite Aid involved 13 schemes, prosecutors found.

Despite his courtroom statements that his motive had not been self-enrichment, Grass in his plea 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 and two other executives, which would have resulted in a $36.5 million financial gain for Grass.

He also has admitted to covering up a deal in which $2.6 million was wired from a Rite Aid account in New York for the purchase of 83 acres in York County, Pa., that was owned by Grass and his brother-in-law, Tim Harrison.

Grass made up a false sales contract for the transaction in summer 2000, backdated it to October 1997 and forced Harrison to sign it. In connection with that deal, Grass has been required to forfeit $3 million.

When Grass learned of an estimated Rite Aid earnings shortfall of $70 million to $100 million for the fourth quarter of fiscal 1999, he incorrectly booked as income $76 million in rebates from vendors. He also admitted inflating the amount of damaged goods reported to vendors, arbitrarily adjusting profits and trying to run up the stock price.

"Mr. Grass is a man who has done wrong; he realized he has done wrong and that he will pay a severe penalty for that conduct," William H. Jeffress Jr., Grass' attorney, said yesterday during the sentencing hearing, in which he urged the judge to impose no more than seven years in light of Grass' cooperation with the government.

"He has lost his job, his career. ... He has lost much of his wealth," Jeffress argued. "More importantly, he has lost his reputation."

Jeffress also noted that the jail sentence means Grass will be separated from family, including his wife Jody, and three children, ages 15, 12 and 7.

Grass' sentencing marked the fall of a man accustomed to the prerogatives of wealth and prominence. His father, Alex Grass, had transformed a discount drug store he opened in 1962 in Scranton, Pa., into a $5.5 billion company based in Camp Hill, Pa., outside Harrisburg. With a master's degree from Cornell University, Martin Grass took on various roles in the company, rising to president.

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