U.S. Securities and Exchange Commission
LITIGATION RELEASE NO. 18728 / MAY 27, 2004
ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 2024 / May 27, 2004
SECURITIES AND EXCHANGE COMMISSION V. FRANK M. BERGONZI, MARTIN L. GRASS, AND FRANKLIN C. BROWN, No. 1:CV02-1084 (M.D.Pa.)
SEC SETTLES FRAUD CASE AGAINST RITE AID'S FORMER CEO
WASHINGTON - The Securities and Exchange Commission announced today that it has reached a settlement with former Rite Aid Corporation CEO Martin L. Grass. On June 21, 2002, the Commission filed accounting fraud charges in federal district court in the Middle District of Pennsylvania against Grass and two other former senior executives of Rite Aid, the nationwide drug store chain based in Harrisburg, Pennsylvania. The Commission submitted the judgment, to which Grass consented without admitting or denying the allegations in the Commission's complaint, to the Hon. J. Rambo today. The Commission's case has been stayed pending the outcome of related criminal actions filed by the United States Attorney for the Middle District of Pennsylvania against Grass and others. Grass, who pled guilty to criminal charges involving his conduct while at Rite Aid, was sentenced earlier today to significant criminal sanctions.
In its civil action, the Commission charged that Grass, Frank M. Bergonzi, Rite Aid's former CFO, and Franklin C. Brown, Rite Aid's former vice chairman and chief legal officer, were responsible for one of the most egregious accounting frauds in recent history. The Commission alleged that Grass and the others conducted a wide-ranging accounting fraud scheme that resulted in the significant inflation of Rite Aid's net income in every quarter from May 1997 to May 1999. The Commission also charged Grass and Brown with concealing certain related party transactions that enriched Grass at shareholder expense, and charged Grass with fabricating Board committee minutes in order to support a lie he told in connection with obtaining a loan critical to keeping Rite Aid in business. After the discovery of improper and unsubstantiated accounting transactions, in July and October 2000 Rite Aid restated cumulative pretax income by a massive $2.3 billion dollars and cumulative net income by $1.6 billion dollars. Rite Aid's restatement was, at the time, by far the largest financial restatement ever by a public company. The Commission's subsequent investigation into the reasons for the restatement culminated in its charges against Grass and the others.
If accepted by the Court, the judgment would order Grass to be barred from acting as an officer or director of a public company. In addition, Grass would be permanently enjoined from future violations of the antifraud, reporting, books and records, internal controls, proxy, and other provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, specifically Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and, as a controlling person pursuant to Section 20(a) of the Exchange Act, Sections 13(a), 13(b)(2), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 14a-9(a). The judgment further provides that the Commission's claim for disgorgement of ill-gotten gains is satisfied by Grass's civil forfeiture of $3 million in connection with his criminal case, and no civil penalty would be imposed in view of such forfeiture.