- The Washington Times - Saturday, June 22, 2002

HARRISBURG, Pa. (AP) Three former Rite Aid Corp. executives were indicted yesterday, charged with 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 announced today reveal a disturbing picture of dishonesty and misconduct at the highest level of a major corporation," said Wayne M. 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 L. Grass, 47, of Virginia Beach, former chairman and chief executive; Franklin Brown, 74, of Harrisburg, former chief counsel and vice chairman; and Franklyn Bergonzi, 57, of Hummelstown, Pa., 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 purchasing or selling securities and making false statements to the Securities and Exchange Commission. Mr. Grass and Mr. Brown are also accused of tampering with witnesses and obstructing various investigations.

Eric S. Sorkin, 53, of Mechanicsburg, executive vice president for pharmacy services, was charged with conspiracy to obstruct justice and making false statements to a grand jury. Mr. 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 Mr. Grass, Mr. Bergonzi and Mr. Brown, who each 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.

Among accusations contained in the 96-page indictment:

•Mr. Grass and Mr. Brown agreed to pay more than $11 million to settle a lawsuit filed by a former executive to silence him after he threatened to tell the news media about a purported scheme in which Rite Aid inflated the value of damaged and outdated merchandise by as much as 50 percent. Prosecutors say the scheme enabled Rite Aid to claim more than $50 million in credits from vendors.

•In pledging stock from then-subsidiary PCS Health Systems Inc. for an interim line of credit in 1999, Mr. Grass directed another officer to fabricate minutes of a meeting of its Health Committee.

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

"Mr. Brown strongly denies that he engaged in any criminal wrongdoing and expects to be fully vindicated," lawyers Reid H. Weingarten and Erik L. Kitchen said in a prepared statement.

Telephone messages left at the homes of Mr. Grass and Mr. Bergonzi were not immediately returned. Mr. Sorkin hung up on a reporter who reached him at home.

Camp Hill-based Rite Aid, which Mr. 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 since.

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