Rite Aid

RITE AID CORPORATION was founded by Alex Grass, who, beginning with a discount store in 1962, founded a chain that by 1995 was the number one drugstore chain in store numbers and second in sales. In May 1989, Alex Grass' son, Martin, was named president of Rite Aid. Rite Aid had purchased Lane Drug two months earlier, and the Ohio Pharmacy Board was dissatisfied with Rite Aid's intrusion into Ohio, and penalized Rite Aid for security violations in the Lane Drug deal.

Martin Grass met with Melvin Wilcznski, a member of the Ohio Pharmacy Board and offered him a bribe to resign from the board. Unknown to Grass, the police were videotaping the meeting at Wilcznski's request. The judge dismissed the charges on the grounds that Ohio's bribery law covered bribes of public officials, but not bribes to resign public office. Grass countersued for defamation and won.

According to Frank Portnoy in his book, Infectious Greed, in 1996, when Rite Aid sold 189 stores for $90 million profit, the company used the money to “absorb operating expenses.” This $90 million was a third of the total 1996 income and stockholders were told in the annual report that “gains from drugstore closing and dispositions were not significant.” After that successful scheme, Rite Aid systematically overstated its profits by $2.3 billion in all. The Securities and Exchange Commission (SEC) reported in 2002 that the fraud included “inflated revenues, reductions of previously recorded expenses, inflated deductions for damaged and outdated products, and unwarranted credits to various stores at the end of particular quarters.”

The SEC charges included a new element: related-party transactions. Grass commingled Rite Aid accounts with other accounts to which he was a “related party” and used Rite Aid funds for personal debts. By 1999, Grass was inventing phony minutes to nonexistent meetings to support loan applications.

Where were Rite Aid's auditors? KPMG was their accounting firm and when they raised questions about irregular accounting practices, Grass threatened that “skeletons would come out of KPMG's closet” if they did not ignore the problematic issues. Grass also gave them an additional consulting contract to sweeten the deal.

Rite Aid paid Grass millions in options; at their peak, his options were estimated at $100 million in value. Finally, in 2002, charges were brought against Rite Aid and Grass. While prosecutors were preparing their case, Grass and a company lawyer were taped fabricating testimony and discussing tampering with documents and destroying the computer that generated them. In 2003, the judge decided the tapes could be used at the trial. Rite Aid stock rose to $50 a share in 1999 before collapsing. By May 2002, it was selling for less than $2 a share.

When new management was brought into the company in 1999 to replace Grass, managers learned that Rite Aid had overstated profits in the late 1990s by $1.6 billion dollars. “U.S. authorities alleged that Rite Aid's former management had orchestrated a massive accounting fraud that rivaled[Page 693] the scandals that helped topple Enron Corporation,” reporter James F. Peltz wrote in the Los Angeles Times. Grass and four other Rite Aid officers were indicted on criminal charges in June 2002. In June 2003, Grass pleaded guilty to a conspiracy charge in exchange for “an eight-year prison sentence, a fine of $500,200, and forfeiture of $3 million in connection with a real estate deal. [He also] promised to testify against remaining defendants,” the Associated Press reported.

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