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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19409 / September 30, 2005

Accounting and Auditing
Release No. 2328 / September 30, 2005

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 LAWYER

WASHINGTON - The Securities and Exchange Commission announced a settlement with former Rite Aid Corporation chief legal officer Franklin C. Brown. On June 21, 2002, the Commission filed accounting fraud charges in federal district court in the Middle District of Pennsylvania against Brown and two other former senior executives of Rite Aid, the nationwide drug store chain based in Harrisburg, Pennsylvania. On September 30, 2005, the Hon. Sylvia H. Rambo signed a final judgment, to which Brown consented without admitting or denying the allegations in the Commission's complaint. The Commission's case had been stayed pending the outcome of related criminal actions filed by the United States Attorney for the Middle District of Pennsylvania against Brown and others. Brown, who was convicted in October 2003 of criminal charges involving his conduct while at Rite Aid, was sentenced in October 2004 to ten years in prison and ordered to pay a $20,000 fine.

In its civil action, the Commission charged that Brown, Martin L. Grass, Rite Aid's former chief executive officer, and Frank M. Bergonzi, Rite Aid's former CFO, were responsible for one of the most egregious accounting frauds in recent history. The Commission alleged that Brown 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 Brown and Grass 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 Brown and the others.

The final judgment bars Brown from acting as an officer or director of a public company. In addition, Brown is 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 and prejudgment interest is waived due to Brown's inability to pay, and no civil penalty is imposed in view of Brown's personal financial condition.


http://www.sec.gov/litigation/litreleases/lr19409.htm


Modified: 09/30/2005