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Ex-Rite Aid execs assert innocence.

HARRISBURG, Pa. -- Martin Grass, former chairman and chief executive officer of Rite Aid Corp., pleaded not guilty last month to 36 counts in a federal indictment connected to the drug chain's accounting practices, which led to one of the largest restatements of earnings in American corporate history.

Two other former high-ranking Rite Aid executives also pleaded not guilty to charges connected to the accounting irregularities during the late 1990s.

They are former general counsel and vice chairman Franklin Brown and former chief financial officer Frank Bergonzi.

Timothy Noonan, the company's former president and chief operating officer, pleaded guilty to a separate charge connected to Rite Aid's internal investigation conducted after new management took over in December 1999.

Noonan is expected to testify against the other defendants if their cases go to trial. He has been cooperating with the federal government since March 2001, and the U.S. Attorney's office in Harrisburg is expected to recommend that Noonan be placed on probation if he continues to work with prosecutors.

Noonan, like Brown, left Rite Aid in early 2000 after the company s new management team took over. Grass and Bergonzi resigned on October 18, 1999.

Also arraigned last month was Eric Sorkin, the drug chain's current executive vice president of pharmacy services, who is now on unpaid administrative leave. Sorkin is charged with obstruction of justice and making false declarations to a grand jury.

Grass, Brown, Bergonzi and Sorkin all entered their notguilty pleas in a 20-minute proceeding before District Court Judge Yvette Kane, who set a September 9 trial date. That date is expected to be postponed, given the complexity of the case.

Kane also accepted Noonan's guilty plea to a charge of misprision of a felony. He admitted to not providing material information during Rite Aid's internal investigation. Kane is not bound to accept the probationary recommendation, and Noonan, who is expected to be sentenced after the other cases end, could receive up to two years in prison.

Noonan's guilty plea sets the stage for the 30-year Rite Aid veteran to testify against his former colleagues.

Noonan's cooperation "has been extraordinary, if not unprecedented, for a senior executive of a major corporation," notes his attorney, David Howard of Philadelphia.

The government acknowledged that Noonan was not the "driving force" or" a key player" in the accounting scheme, but it asserts he was familiar with some of Rite Aid's activities that enabled the company to inflate earnings.

The government indicated that Noonan was acquainted with a practice the retailer used to inflate the deductions it took for damaged and outdated goods from suppliers. The inflated deductions enabled Rite Aid to take improper credits from vendors of some $53 million from 1995 to 1999, according to prosecutors.

Noonan also was familiar with the company's decision to charge suppliers for markdowns of discontinued merchandise, they added. Those credits, totaling about $30 million, were taken in February 1999 when the drug chain was desperately searching for additional sources of income to improve its profitability.

Prosectors say Noonan failed to tell Rite Aid's internal investigators about a backdated severance letter he received in December 1999, two months after Grass resigned from the company. The letter was backdated to January 1999, when Grass still was the chief executive officer. Noonan never tried to cash in the backdated severance letter.

Two other Rite Aid employees also received backdated letters after Grass resigned, the government alleges. Prosectors contend one of those employees was Sorkin, who denied receiving such a letter to the grand jury. Sorkin told the grand jury he received his severance letter in April 1999.

Grass, Brown, Bergonzi and Sorkin spoke very little during their arraignments.

"We'll do all our talking in the courtroom," Grass said as he left the arraignment.

The four were all released on their own recognizance after surrendering their passports. Noonan also is free on his own recognizance.

Grass, who lives in Virginia Beach, Va., faces 36 counts ranging from mail and wire fraud to filing false quarterly and annual statements to the Securities and Exchange Commission (SEC), conspiracy to defraud investors, conspiracy to obstruct justice, trying to impede grand jury and SEC investigations, and tampering with a witness.

He could face a significant amount of prison time if he is convicted of the charges.

Brown also faces 36 counts, and Bergonzi faces 28 counts, although he does not have to deal with obstruction of justice charges.

The SEC, meanwhile, has filed a civil complaint in federal court in Harrisburg against Grass, Brown and Bergonzi. The SEC is seeking the repayment of bonuses that the three received due to the inflated earnings reports and the stock price performance that was based on those reports.

The government contends that Rite Aid's earnings under Grass's leadership were a "ruse and a mirage" that deceived investors.

Grass became chairman and chief executive officer in March 1995, succeeding his father, Alex Grass, who founded the company in 1962.

Upon taking over, Martin Grass embarked on a strategy of acquisitions, rapid store growth with new freestanding buildings and the purchase of a pharmacy benefits management company.

Those activities increased Rite Aid's debt significantly and led to the financial difficulties that ended the Grass connection to the nation's third-largest drug chain in 1999.
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Publication:Chain Drug Review
Article Type:Brief Article
Geographic Code:1USA
Date:Aug 5, 2002
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