Fraud charged in Rite Aid investigation

HARRISBURG, Pa. — Three former Rite Aid executives were indicted yesterday for allegedly falsifying the books in a scheme that inflated the drugstore chain's profits by $1.6 billion and forced the biggest restatement of corporate earnings in U.S. history.

The 37-count federal indictment also accused a current executive at the nation's third-largest drugstore chain of lying to a grand jury.

"The charges ... reveal a disturbing picture of dishonesty and misconduct at the highest level of a major corporation," said Wayne Carlin, Northeast regional director of the Securities and Exchange Commission. "Rite Aid's former senior management employed an extensive bag of tricks to manipulate the company's reported earnings and defraud its investors."

Martin Grass, 47, of Virginia Beach, Va., the former chairman and chief executive; Franklin Brown, 74, of Harrisburg, the former chief counsel and vice chairman; and Franklyn Bergonzi, 57, of Hummelstown, Pa., a former executive vice president and chief financial officer, face the most serious charges.

The three face charges including conspiracy to defraud, fraud in connection with the purchase or sale of securities, and making false statements to the Securities and Exchange Commission. Grass and Brown also are accused of tampering with witnesses and obstructing various investigations.

Eric S. Sorkin, 53, of Mechanicsburg, Pa., executive vice president for pharmacy services, was charged with conspiracy to obstruct justice and making false statements to a grand jury. Sorkin was suspended until further notice yesterday morning, when the company found out about the indictment, a spokeswoman said.

Also yesterday, the SEC said it filed separate, civil lawsuits seeking penalties and the repayment of more than $4 million in annual bonuses by Grass, Bergonzi and Brown, who all left Rite Aid in 1999 and 2000, and an order barring any of them from ever serving as an officer or a director of a publicly owned company.

Rite Aid's July 2000 earnings restatement, reducing its earnings in the late 1990s by $1.6 billion, was the largest in U.S. history, prosecutors and the SEC said.

Grass, in a statement faxed from his office in Boiling Springs, said he had not reviewed the indictment but that he did not break any laws.

Two Washington-based lawyers representing Brown said the indictment "grossly distorts events at Rite Aid and mischaracterizes acts taken in good faith for the benefit of the company."

A telephone message left at Bergonzi's home was not immediately returned. Sorkin hung up on a reporter who reached him at home.

The four are scheduled to appear July 16 in federal court in Harrisburg.

Camp Hill-based Rite Aid, which Grass' father founded more than 40 years ago, operates 3,600 stores in 30 states and the District of Columbia. It reported sales of nearly $15 billion in fiscal 2001.

Rite Aid grew rapidly during the late 1990s. Fortune magazine counted it among "America's Most Admired Companies" in 1998 and its stock hit an all-time high of $50.94 a share in 1999. But accounting irregularities surfaced that year, and Rite Aid has been struggling ever since.

In trading Friday, Rite Aid shares rose 11 cents, or 2.7 percent, to close at $2.69 on the New York Stock Exchange.

Karen Rugen, a Rite Aid spokeswoman, said the company has "changed the way we do business, include strengthening our financial controls."

"We're a very different company and a much stronger company than we were two years ago," Rugen said.

The company's new management switched auditing firms in 2000 to Deloitte & Touche. No charges were filed against KPMG, which resigned as Rite Aid's accountant in late 1999.