U.S. Securities and Exchange Commission
Litigation Release No. 18727 / May 26, 2004
Accounting and Auditing Enforcement Release No. 2023 / May 26, 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 CFO
WASHINGTON - The Securities and Exchange Commission announced today that it has reached a settlement with former Rite Aid Corporation CFO Frank M. Bergonzi. On June 21, 2002, the Commission filed accounting fraud charges in federal district court in the Middle District of Pennsylvania against Bergonzi 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 Bergonzi consented without admitting or denying the allegations in the Commission's complaint, to the Hon. J. Rambo. The Commission's case has been stayed pending the outcome of the related criminal actions against Bergonzi and others. Bergonzi, who pled guilty to criminal charges involving his conduct while at Rite Aid in a case filed by the United States Attorney for the Middle District of Pennsylvania, was sentenced earlier today in connection to significant criminal sanctions.
In its civil action, the Commission charged that Bergonzi, Martin L. Grass, Rite Aid's former CEO, and Franklin C. Brown, the former vice chairman and chief legal officer, were responsible for one of the most egregious accounting frauds in recent history. The Commission alleged that Bergonzi 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. 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 Bergonzi and the others.
The judgment would order Bergonzi to be barred from acting as an officer or director of a public company. In addition, Bergonzi would be permanently enjoined from future violations of the antifraud, reporting, books and records, internal controls, 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) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. Bergonzi would not be ordered to pay civil penalties, and disgorgement of $299,774.00 plus prejudgment interest of $199,066.70 would be waived, based on his financial condition.