SEC Announces Fraud Charges Against Former Rite Aid Senior Management June 21, 2002

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SEC Announces Fraud Charges Against Former Rite
Aid Senior Management June 21, 2002
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Accounting Fraud Charges As a result of the
fraudulent accounting practices, Rite Aid
inflated its reported pre-tax income by the
following amounts 1Q98 38  2Q98
66  3Q98 16  FY98
91Q99 71  2Q99 5,533  3Q99
94  FY99 reported pre-tax income of
199.6 million, when actual results were loss of
14.7 million 1Q00 54 
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• The Securities and Exchange Commission announced
  fraud charges against
• former Rite Aid CEO Martin Grass
• former CFO Frank Bergonzi and
• former Vice Chairman Franklin Brown
• with conducting a wide-ranging accounting fraud
  scheme.

The charges allege that Rite Aid overstated its
income in every quarter from May 1997 to May
1999, by massive amounts. When this practice was
discovered, Rite Aid was forced to restate its
pre-tax income by 2.3 billion and net income by
1.6 billion, the largest restatement ever
recorded.
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Upcharges Rite Aid inflated the deductions it
recorded for amounts owed to vendors because of
damaged and outdated products when the vendors
did not require the merchandise to be returned.
Rite Aid would increase the proper amount, thus
overcharging vendors by amounts ranging from 35
to 50. Stock Appreciation Rights (SARs) Rite
Aid did not record accrued expenses for stock
appreciation rights given to its employees. This
allowed employees to receive cash or stock based
on Rite Aid stock price increases. When Rite
Aids independent auditors asked if any SARs
existed, Bergonzi denied that any had been
issued. Reversals of Actual Expenses Several
times Gergonzi directed the accounting staff to
reverse expenses that had already been paid for
without cause. They would then be put back on
the books in a subsequent quarter, which caused
the income from the previous quarter to be
overstated.
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"Gross Profit" Entries Bergonzi directed his
accounting staff to make improper adjusting
entries to reduce the cost of goods sold without
substantiation, for the sole purpose of
manipulating Rite Aids Earnings.  Undisclosed
Markdowns Rite Aid overcharged vendors for
markdowns, which the retailers never agreed to
pay. Rite Aid led vendors to believe that these
deductions were for damaged and outdated goods.
Vendor Rebates On the last day of the fiscal
year 1999, Bergonzi directd Rite Aid to reduce
accounts payable based on rebates. Two weeks
after year end, he had the books reopened and
added 33 million in credits. Both of these were
funds that Rite Aid has no legal entitlement to
at the time of record. Even if they did have
title to them, due to vendor agreements, more
than half should have been distributed to
vendors.
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Litigation Settlement Grass, Bergonzi, and
Brown caused Rite Aid to receive 17 million in
litigation settlements, which was recognized
before the litigation was legally binding. 
"Dead Deal" Expense When Rite Aid considered
building new sites, fees were incurred from legal
services, title searches, architectural drawing,
etc. They capitalized these fees at that time.
If Rite Aid decided not to follow through with
that site, those fees should have been written
off to expenses. Rite Aid carried them as
assets, however.  "Will-Call" Payables If a
customer called in a prescription and never came
to pick it up, Rite Aid would already have been
given payments from insurance companies. These
were put in a payable account to give back to the
insurance companies. Bergonzi reversed 6.6
million that should have been paid back-Rite
Aids general council learned of this and
directed for this reversal to be cancelled.
Bergonzi agreed, then secretly directed other
improper offsetting entries to achieve the same
effect. Inventory Shrink If physical
inventory counts were less than inventory on the
books (due to damage or theft), Rite Aid should
write down the books to reflect the shrink. In
one case Rite Aid did not record this shrink
which overstated their inventory, and also
reduced their shrink expense causing an
increase to income.
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Related-Party Transactions with Grass Grass also
failed to disclose personal interests in three
properties that Rite Aid Leased as store
locations. He funneled 2.6 million into a
non-Rite Aid partnership account with a relative,
and used it to purchase a site intended for a new
Rite Aid headquarters. After being questioned he
transferred the money back to Rite Aid from a
personal account. Fabrication of Minutes by
Grass In September 1999 Rite Aid was in serious
financial problems, and Grass obtained a bank
line of credit as directed by a meeting that
never happened. Grass created minutes for a
meeting of Rite Aids Finance Committee, stating
they authorized stock to be used as collateral.
Grass signed these minutes knowing that this
meeting never took place.