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Friday, May 28, 2004 - Page updated at 12:00 A.M.
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Northwest stock contest 2004 | Consumer affairs

Former CEO of Rite Aid to serve eight years in prison

By Mark Scolforo
The Associated Press

Martin Grass
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HARRISBURG, Pa. — Former Rite Aid chief executive Martin Grass was sentenced to eight years in prison yesterday for conspiring to falsely inflate the value of the company his father founded more than four decades ago and to cover up the scheme.

Grass, 50, who headed up the nation's third-largest pharmacy chain in the late 1990s before being forced out in October 1999, also was fined $500,000 and given three years' probation for his role in a billion-dollar accounting fraud that sent the company's stock tumbling.

In all, six former Rite-Aid executives were convicted or pleaded guilty in the scandal, in which the company inflated its earnings.

Before U.S. District Judge Sylvia Rambo handed down the sentence, Grass apologized to Rite Aid, its stockholders and employees.

"For the harm caused to them, I am truly sorry," he said.

On the eve of a trial that was to start last June, Grass pleaded guilty to conspiracy to defraud Rite Aid and its shareholders and conspiracy to obstruct justice, in a deal that required him to cooperate with prosecutors.

After Rambo rejected a plea deal that called for up to eight years in prison, Grass reached a new deal that capped his potential sentence at 10 years in prison. His sentence yesterday reflected credit for help he provided to the government.

Assistant U.S. Attorney Kim Douglas Daniel described to the judge Grass' crimes: The company made millions from improper vendor charges and recorded income improperly; $2.8 million in company funds were used for a land deal that benefited Grass personally; and after he left the company, Grass issued seven backdated severance letters to fellow executives worth a combined $23 million.

In the process, Daniel said, Grass "deceived and misled thousands of individual and institutional investors and creditors."

The "grand conspiracy to obstruct justice" that Grass helped orchestrate was designed to fool the company, the Securities and Exchange Commission, the FBI and a grand jury, Daniel said.

During Grass' time at the head of the Camp Hill, Pa.-based company founded by his father, Alex Grass, in 1962, its stock price soared as Rite Aid engaged in an aggressive expansion effort.
Grass told the judge he began at Rite Aid at age 13, and was a stock boy and warehouse employee who worked during school vacations before joining the company as an executive, he said.

"I was ambitious for the company, and I was ambitious for myself," Grass told Rambo. "I wanted to build Rite Aid into a major national drugstore chain."

Grass took control in 1995 and began an acquisition spree. Rite Aid grew from 1,618 stores and $943 million in debt in 1995 to 3,821 stores and $4.1 billion in debt by 1999.

But the grand jury said the boom years were accomplished by "massive accounting fraud, the deliberate falsification of financial statements, and intentionally false SEC filings."

Less than a year after Grass left the company, the new management team restated the company's net earnings for 1998 and 1999, reducing them by $1.6 billion. Rite Aid recently recorded its first profits since the Grass years.

"As it turns out, I tried to do too much, too fast," Grass told the judge yesterday.

When the company's finances took a turn for the worse in early 1999, he said, "I did some things to try and hide that fact."

"Those things were wrong. They were illegal," he said. "I did not do them to line my own pockets."

Rambo recommended him for a federal prison camp and said he must turn himself in on June 28. Grass and his lawyers declined to comment as they left the courthouse.

The eight-year sentence is considerably longer than those of three other former Rite Aid executives sentenced this week on conspiracy charges.

Former chief financial officer Franklyn Bergonzi was sentenced to 28 months in prison; former vice president Eric Sorkin received five months in jail and five months of house arrest; and former vice president Philip Markovitz will serve a month in jail and five months house arrest.

The man who briefly succeeded Grass as interim CEO, Timothy Noonan, is scheduled to be sentenced June 8 for one count of withholding information from company investigators.

Former Rite Aid vice chairman and chief counsel Franklin Brown was the only defendant to go to trial and in October was found guilty by a jury of 10 criminal counts. No sentencing date has been set for Brown.

Rite Aid operates 3,400 stores in 28 states and the District of Columbia and has 72,500 employees.

Copyright © 2004 The Seattle Times Company

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