FRAUD CASE

Fraud Case

Fraud Case

Rite Aid Corporation

During all time periods encompassed by this Indictment, Rite Aid Corporation, hereinafter referred to as “the Company,” was a publicly held corporation duly organized and existing under the laws of the State of Delaware. Incorporated in 1968, its primary business was the operation of retail drug stores(Staff, 2009). The Company also engaged in pharmacy benefits management, the marketing of prescription plans, and managed health care services.

Rite Aid's headquarters and o a e senior executive offices were located at 30 Hunter Lane, Camp Hill, Pennsylvania. Most of its accounting department personnel were located at a separate facility in Valley Green, PA. As a publicly owned corporation, Rite Aid's stock was traded on the New York Stock Exchange(Thomas, 2009). As of May 10, 1999, the Company had more than 258 million outstanding shares of common stock. The Company also sold short term notes (commercial paper) and other securities to the public.

Discovery Of The Scheme To Falsify Rite Aid's Financial Statements

As described in further detail in this Indictment, GRASS, Noonan, BROWN and BERGONZI's portrayal of Rite Aid as a profitable company was a ruse and a mirage. The deception was accomplished through massive accounting fraud, the deliberate

falsification of its financial statements, and intentionally false SEC filings(Gupta, Aparna, 2005). GRASS, BROWN, and BERGONZI devised, organized and implemented the scheme, which was accomplished by deliberately understating the Company's expenses and overstating its income by hundreds of millions of dollars(Staff, 2009). BERGONZI coordinated the accounting fraud, directing subordinates in Rite Aid's Accounting Department to make arbitrary, unsupported entries that did not comport with GAAP in the Company's books and records.

SEC Scrutiny

On November 6, 1998, the Company filed a Registration Statement with the SEC which contained key financial information for prior years. As a consequence, the SEC sent Rite Aid numerous Comment Letters that questioned several aspects of Rite Aid's accounting practices. Over the course of the next 10 months BERGONZI caused false and misleading information to be submitted to the SEC in response to its inquiries.

The 4th Quarter FY 1999 Shortfall

On March 12, 1999, the Company issued a Press Release announcing a shortfall in its anticipated 4th Quarter FY 1999 earnings. The Release estimated the quarter's earnings at $0.30 to $0.32 a share, well below Wall Street (First Call Consensus) expectations of $0.52 per share. As a result of the unexpected shortfall, the price of Rite Aid stock plummeted from $37.00 to $22.56, a one day decline of 39%. In an attempt to stop the decline, and as a public show of confidence, on March 15, 1999, Noonan bought 10,000 shares and GRASS bought 200,000 shares (approx. cost $4.6 million) of Rite Aid stock. However, on March 29, 1999, the Company issued another press release which downwardly revised its March 12, 1999, estimate even lower to $0.28 per share.

The FY 1999 Audit

During the Spring of 1999 the Company's accounting came under scrutiny in connection with its FY 1999 ...