Federal grand jury indicts drug-store chain executives

Some say scandal worse than Enron allegations

? A federal grand jury indicted four former and current executives of the Rite Aid Corp. drug-store chain Friday on charges of running a massive accounting fraud that experts described as brazen even when measured against other recent corporate scandals.

The 37-count criminal indictment alleged that Rite Aid’s former chief executive, Martin Grass, and other senior officials used a variety of bogus accounting maneuvers to inflate the company’s earnings in the late 1990s. The hoax resulted in the biggest restatement of earnings in U.S. history $1.6 billion when it finally unraveled in 1999.

Martin Grass, 47, of Virginia Beach, Va., the former chairman and chief executive officer of Rite Aid, is among senior officials of the firm charged in a 37-count criminal indictment. Grass faces the most serious charges, including conspiracy to defraud, making false statements to the Securities and Exchange Commission, tampering with witnesses and obstructing various investigations.

The Rite Aid indictment marks the third time in three weeks that prominent corporate figures have been charged with criminal behavior, adding to the crisis of confidence that has enveloped America’s business leadership.

Earlier this month, L. Dennis Kozlowski, the deposed chief executive of Tyco International Ltd., was indicted on charges of evading New York state sales taxes. Last week, Samuel Waksal, former head of ImClone Systems Inc. was charged with insider-trading violations.

If the government’s allegations prove true, what went on at Rite Aid, the nation’s third-largest drugstore chain, would far transcend the aggressive accounting said to have occurred at Enron Corp., Global Crossing Ltd. and Adelphia Communications Corp., said Seth Taube, a white-collar defense attorney at McCarter & English in Newark, N.J.

At Rite Aid, prosecutors alleged that top executives simply ordered underlings to alter bookkeeping records by tens of millions of dollars to make the company’s financial performance appear better than it was.

When Rite Aid was in desperate need of a bank loan to avert bankruptcy in late 1999, Grass allegedly told lenders that a Rite Aid committee had agreed to pledge a key company subsidiary as collateral. In truth, the committee had never met and Grass had falsified the paperwork, the government alleged.

“This isn’t pushing the edge of the ethical envelope,” Taube said of the Rite Aid charges. “Here the envelope was torn up and thrown away. You can get a gun and rob a bank or you can make up numbers at a public company. Either way, it’s a crime.”

The most serious charges were leveled at Grass, Franklyn M. Bergonzi, Rite Aid’s former chief financial officer; and Franklin Brown, its former chief counsel.

The charges against Grass and Brown include securities fraud, conspiracy, obstruction of justice and witness tampering. The Bergonzi charges include securities fraud conspiracy and making false statements.

Eric S. Sorkin, an executive vice president, was the only current employee named in the indictment. He was charged with obstruction of justice and making false statements to a grand jury. The company suspended Sorkin on Friday.

Timothy J. Noonan, Rite Aid’s former president, cooperated with prosecutors and plead guilty to concealing knowledge of wrongdoing by others.

None of the executives responded to requests for interviews.