HARRISBURG (AP) — Former Rite Aid Corp. Chairman Martin L. Grass and three other one-time Rite Aid executives pleaded innocent Thursday to federal criminal charges stemming from their alleged participation in an accounting fraud intended to make the company more attractive to investors.
Flanked by lawyers in a proceeding that lasted less than 30 minutes, the four men all were required to surrender their passports before being released on their own recognizance. None commented about the case to reporters as, one by one, they left the federal building after being processed and fingerprinted.
The unraveling of the alleged accounting scheme in 1999 sent Rite Aid's stock plummeting after peaking at more than $50 earlier that year and forced the nation's third-largest drugstore chain in July 2000 to increase its losses by $1.6 billion — the largest restatement of corporate earnings in U.S. history.
Grass, 47, of Virginia Beach, Va., who doubled as the company's chairman and chief executive officer; Franklin Brown, 74, of Harrisburg, the former chief counsel and vice chairman; and Franklyn Bergonzi, 57, of Hummelstown, a former executive vice president and chief financial officer, are the primary defendants.
Charges against the trio include conspiracy to defraud, fraud involving the purchase or sale of securities, and making false statements to the Securities and Exchange Commission. Grass and Brown also are charged with tampering with witnesses and obstructing various investigations.
Also arraigned yesterday was Eric S. Sorkin, 53, of Mechanicsburg, Rite Aid's executive vice president for pharmacy services, who was suspended last month after he was indicted for conspiracy to obstruct justice and making false statements to a grand jury.
The judge advised the defendants of the potential penalties they face. Most of the offenses carry a maximum of five years in prison and a $250,000 fine, but the securities-fraud charge is punishable by as long as 10 years behind bars and a $1 million fine.
Kane set a trial date of Sept. 9, though prosecutors said that was likely to be pushed back to allow time for lawyers to spar over pretrial motions.
Grass, Brown and Bergonzi are accused of orchestrating a wide-ranging conspiracy to inflate Rite Aid's profits and understate its losses. Prosecutors allege, for example, that numerous false entries were made in financial records filed with the SEC and that Rite Aid defrauded vendors of tens of millions of dollars by claiming bogus credits for damaged and outdated products.
In separate, civil lawsuits, the SEC is 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. Authorities also want an order barring any of them from ever serving as an officer or director of a publicly owned company.
Yesterday's arraignments came one day after Timothy J. Noonan, the former Rite Aid Corp. executive who helped federal prosecutors, pleaded guilty to a felony charge of withholding information from the company's internal investigators.
Noonan also was released on his own recognizance. The 60-year-old Mechanicsburg resident, who became the company's president and chief operating officer during a three-decade career at Rite Aid, faces up to three years in prison and a $250,000 fine. No sentencing date was set.
Under a plea agreement he signed in November, Noonan agreed to cooperate with prosecutors in building the case against the other executives, including working in an "undercover capacity."
Rite Aid currently operates about 3,450 stories in 30 states and the District of Columbia.
