Rite Aid GC Scheduled for Trial in Major Corporate Fraud Case

Franklin C. Brown, who rose from staff attorney for the original single Rite Aid Corp. drugstore in 1963 to become chief counsel and vice chairman of the board, is not your typical high-rolling, white-collar criminal defendant. He stands accused of nearly destroying the company he helped build by taking part in a $1.6 billion accounting fraud. Brown is due to go on trial today on 35 criminal counts in the country's second-largest corporate fraud scandal.

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Franklin C. Brown is not your typical high-rolling, white-collar criminal defendant. The 75-year-old Brown, who rose from staff attorney in 1963, when Rite Aid Corp. was one drug store, to become chief counsel and vice chairman of the board, stands accused of nearly destroying the company he helped build by taking part in a $1.6 billion accounting fraud. Barring a last-minute deal, Brown will go on trial today in U.S. District Court in Harrisburg, Pa., on 35 criminal counts. And he will stand alone before federal Judge Sylvia Rambo to answer for the country’s second-largest corporate fraud scandal, after WorldCom. Former CEO Martin L. Grass pleaded guilty on June 17 and former Chief Financial Officer Frank Bergonzi reached a plea agreement on June 6. Both are cooperating with prosecutors and may testify against Brown. In essence, the initial charges claim that the three men conspired to cook the books to inflate falsely Rite Aid’s stock value between May 1997 and November 1999, and then lied to the Securities and Exchange Commission (SEC). Rite Aid brought in new management in late 1999, admitted it had overstated its income by $1.6 billion, narrowly avoided bankruptcy, and now appears to be successfully rebuilding. Brown’s attorney, Reid Weingarten, called Brown “a Harrisburg boy who grew up and went to work for the founder of Rite Aid,” based in Camp Hill, Pa., near Harrisburg. He helped to expand the company into one of the largest drug store chains in the country. Brown made “Rite Aid his second family for more than 30 years,” said Weingarten, a partner at Steptoe & Johnson in Washington. “His actions are completely inconsistent with a guy who was trying to hurt Rite Aid.” Weingarten said prosecutors have an accounting case, and Brown “only did the lawyering. He had nothing to do with the accounting. That seems to be a general theme of prosecutors these days — an assumption that general counsel know everything that goes on in accounting.” Weingarten also represents criminal defendants in the WorldCom, Enron and Tyco scandals. But Rite Aid is the first high-profile case in which a high-ranking executive has reached trial. NO PLEA EXPECTED Brown’s other attorney, Joseph Metz of Dilworth & Paxson in Philadelphia, said Brown would not accept a plea deal because “he believes in the validity of his position, that there may have been some errors in judgment, but that he committed no fraud.” Metz said Brown held on to stock that dropped from a high of $50 to around the current $4, losing “millions in stock value — a slick white-collar criminal wouldn’t have done that.” The U.S. attorney’s office declined to discuss the case. Court documents specifically accuse Brown of misleading the accounting firm KPMG regarding the timing of a $17 million litigation settlement in order to cover up a $1 million loss. Brown is accused of causing KPMG to include the settlement in the quarter in which an oral agreement was reached, but before any settlement money had exchanged hands. Brown is also accused of knowingly allowing Rite Aid to defraud vendors by systematically inflating deductions against amounts owed to vendors for damaged and outdated products and for rebates and other vendor charges. In addition, in an effort to cover up some land misdealings, Brown allegedly prepared backdated documents for Grass. Brown’s trial is expected to last three to four weeks. If convicted on all counts, Brown would face prison time “that would be off the charts” under tough, new federal sentencing guidelines for corporate fraud, Weingarten said. Ex-CEO Grass, the son of Rite Aid’s founder, who pleaded guilty to two counts of conspiracy, could face up to an eight-year prison sentence and $3.5 million in fines and forfeitures. During his plea, he implicated Brown in the backdating of documents. Ex-CFO Bergonzi, who pleaded guilty to one count of conspiracy, faces up to five years in prison and a fine of $250,000. Former President Timothy J. Noonan, the first to flip, previously pleaded guilty to one felony involving concealing knowledge of a crime. Noonan helped gather evidence against the other three, including taping incriminating conversations. Prosecutors have recommended probation for him. Another defendant, Eric S. Sorkin, Rite Aid’s former executive vice president for pharmacy services, faces a separate trial on lesser charges. The scandal also led to SEC actions and investor law suits. The consolidated investors’ suit won a $126 million settlement from accountants KPMG in early June, in addition to a $200 million settlement from Rite Aid in 2000.

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