The former head of Rite Aid Corp. pleaded guilty to conspiracy Tuesday in a billion-dollar accounting scandal that foreshadowed other cases of American corporate wrongdoing.
Martin L. Grass, 49, faces an eight-year prison sentence and penalties totaling more than $3.5 million under a deal submitted by federal prosecutors. He becomes the first major CEO to plead guilty in an accounting fraud case since the Enron scandal led to public outrage over white-collar offenders.
“Mr. Grass and his associates had a very large appetite, a greedy appetite. They’re getting their just desserts today,” U.S. Attorney Thomas A. Marino said after the plea hearing.
The Rite Aid probe began before other high-profile business scandals made household names of such companies as Enron and WorldCom, but it shares common elements with the later investigations, said Bryan Sierra, spokesman for the Department of Justice’s criminal division.
“The circumstances you had in the Rite Aid case (were) precisely what we’re looking at on a national scale now,” said Sierra â€” accounting fraud, conspiracy and the implication of top executives.
Grass, the former chairman and CEO of the drugstore chain his father founded, was indicted by a federal grand jury a year ago this month along with two other former executives and one current employee of the Camp Hill-based company.
Flanked by his attorneys, Grass appeared before U.S. District Judge Sylvia H. Rambo as prosecutors outlined a plea bargain that calls for him to plead guilty to one count of conspiracy to defraud Rite Aid and its shareholders and one count of conspiracy to obstruct justice.
Remaining charges would be dismissed if Rambo accepts the deal. The prosecutors have agreed to drop charges of fraud in the purchase or sale of securities, obstructing grand jury proceedings, obstructing proceedings of a government agency, witness tampering, 13 counts of lying to the SEC, 10 counts of mail fraud and six counts of wire fraud. The judge said she would make a decision following a pre-sentence investigation.
Grass, who was set to go to trial next week, agreed to the prison term, a fine of $500,200 and forfeiture of $3 million stemming from the use of company money to finance a private real estate deal. He also promised to cooperate with the government and potentially testify against other defendants.
Afterward, Grass attorney William H. Jeffress Jr. called it “a sad day” for his client but noted Grass never sold his shares as the company’s stock price skyrocketed.
“Nobody’s ever accused Martin of lining his pockets at the expense of Rite Aid,” Jeffress said. Grass did not respond to questions on his way into and out of the federal building.
Grass, who has already submitted to interviews with prosecutors, remained free on a personal-recognizance bond.
If Grass’ cooperation satisfies prosecutors, they could ask Rambo to reduce the eight-year term, but Marino said there is “absolutely no possible way” Grass will avoid imprisonment altogether.
The plea makes Grass the second of the four high-ranking Rite Aid executives indicted last June to strike a deal with federal prosecutors. Two weeks ago former company chief financial officer Franklyn M. Bergonzi pleaded guilty to one count of conspiracy and agreed to cooperate with prosecutors.
Grass’ plea means Rite Aid’s former vice chairman and chief counsel, Franklin C. Brown, will stand trial alone in federal court starting Monday. He is charged with conspiracy, fraud, witness tampering, 13 counts of lying to the Securities and Exchange Commission and other offenses.
The fourth man indicted by the grand jury, Eric S. Sorkin, Rite Aid’s vice president for pharmacy purchasing, is expected be tried separately on charges of conspiracy to obstruct justice and lying to a grand jury. He is on unpaid administrative leave from the company.
Grass admitted to a series of illegal activities that ranged from back-dating contracts and severance letters to hiding a $2.6 million real-estate deal from the company and federal regulators.
Grass’ admissions also implicated Brown, whose attorney Matt Stennes attended the proceeding and said afterward he disputed Grass’s version of events and was “assessing the situation.”
Rite Aid’s stock, which peaked at more than $50 a share in 1999, fell 5 cents to close at $4.38 in trading Tuesday on the New York Stock Exchange. The stock surged more than 10 percent Monday after news of the pending plea agreement.
The grand jury alleged that the meteoric increase in Rite Aid’s stock price under the Grass team’s management in the late 1990s was accomplished by “massive accounting fraud, the deliberate falsification of financial statements, and intentionally false SEC filings.”
The pleas have no bearing on a parallel action filed by the SEC against Grass, Bergonzi and Brown, which has been put on hold pending the resolution of the federal criminal prosecutions.
In the wake of the scandal, Rite Aid was compelled to issue a $1.6 billion restatement of net earnings in July 2000. To turn the company around, the new management team has unloaded assets, closed hundreds of stores and restructured Rite Aid’s once-crippling debt.
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