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Jury Conviction for Former Rite Aid Exec

Faces a possible 65 years in prison, $2.5 million in fines. Also: for a more diverse board, an alternative to the ''old boys''; Quattrone trial suspended for two days; and more.
Stephen Taub, CFO.com | US
October 21, 2003

A former top executive of Rite Aid Corp. was convicted on 10 federal criminal charges in one of the biggest accounting scandals in recent memory.

Believe it or not, it also marked the first jury conviction of an individual since the recent wave of corporate scandals began about two years ago with the collapse of Enron Corp., according to the Associated Press. But since then, of course, dozens of formerly high-flying executives have pleaded guilty to various charges of wrongdoing.

Former Rite Aid vice chairman and chief counsel Franklin Brown was convicted of crimes including making false statements to the Securities and Exchange Commission, obstructing justice, and witness tampering, according to Reuters.

He was acquitted of wire fraud.

Brown, 75, faces a maximum of 65 years imprisonment and $2.5 million in fines on the 10 counts. The witness-tampering count alone carries a sentence of up to 10 years, according to the wire service.

"We're all satisfied. This jury did what one hopes juries will do. They looked at the evidence and they fairly and truly tried the case," Assistant U.S. Attorney Martin Carlson said, according to the AP.

Brown conspired to inflate income at the drugstore chain in the late 1990s, helped backdate severance letters so he and other senior executives could collect big payouts, and tried to mislead internal and federal investigators, according to reports, citing prosecutors.

Defense attorney Reid Weingarten said Brown was a zealous company lawyer, but never a lawbreaker. Weingarten also suggested some of the former executives who testified against Brown had lied. "These would have been normal business transactions in a different environment," he added, according to wire service accounts.

Brown was indicted by a federal grand jury in June 2002 along with former chief executive Martin L. Grass, former chief financial officer Franklyn M. Bergonzi, and Eric S. Sorkin, the vice president for pharmacy purchasing who has since left the company. (See "Cash-and-Apothecary.") The three other executives pleaded guilty, along with another executive implicated in the scandal.

In 2000, under new management, the drugstore chain restated net income by $1.6 billion.

Brown, who backed out of a plea agreement during the summer, was offered a chance to plead guilty to one count — a "far better" deal than the jury verdict Friday, according to Assistant U.S. Attorney Kim Douglas Daniel.

Prosecutors claimed Brown helped Grass use $2.6 million of Rite Aid money to buy an 83-acre parcel in York County, Pennsylvania, from a private company headed by Grass, according to the AP. Grass hoped to one day build a new company headquarters on the land, according to the report.

Prosecutors also alleged Brown played a role in booking millions in revenue from a business deal into fiscal year 1999 to cover a $100 million-plus hole, even though the deal had not been finalized and was not legally binding, said the report.

For a More Diverse Board, an Alternative to the ''Old Boys''
The recent rash of corporate scandals and subsequent effort by Congress to get tough on Corporate America has directed some of the focus on the role of boards of directors, which have been accused of being a sleepy, compliant, small club of males.

As more and more boards look to improve their diversity, enter the Directors' Council. Founded by a group of eight women, the council is the first executive search firm to focus exclusively on director recruitment, according to USA Today.

"Almost every board has reached the point of wanting more diversity, but they don't know where to look," former Qwest executive Jane Evans, one of the founders of the Directors' Council, told the paper.

The goal of the Phoenix-based organization, explained the paper, is to help boards identify and recruit independent directors from the ranks of female and minority executives. AT&T Wireless and Time Warner have already signed on and are paying a typical headhunter's fee, according to the report.

"This isn't a revolutionary idea. Many boards are trying to become more independent," Playboy CEO Christie Hefner, another founder, told the paper. "But we feel we can help accelerate the rate of change."

According to the Directors' Council, less than 14 percent of Fortune 1,000 board seats are filled by women. Minorities, adds the council, hold less than 7 percent of board seats even though they account for 29 percent of the workforce.

Other founders of the council include former Voyager Expanded Learning CEO Michele Hooper, retired Marsh & McLennan executive Karen Horn, Podium Prose president Gwendolyn King, USA Networks founder Kay Koplovitz, Munger Tolles & Olson partner Vilma Martinez, and M One CEO Marilyn Seymann.

"Many boards have become too complacent," Evans told the paper. "We are not part of the old boys' network, so there is no chance of us keeping our mouths shut so as not to offend our friends."

Quattrone Trial Suspended for Two Days
The judge presiding over the trial of former investment banker Frank Quattrone suspended jury deliberations on Monday for at least two days because there are not enough jurors available, according to Reuters.


The trial may resume Wednesday.

At the same time, U.S. District Judge Richard Owen turned down a defense motion to declare a mistrial.

One unnamed juror was absent on Monday because his wife was giving birth to the couple's first child, the judge reportedly said. This presented "a major problem" because it reduced the jury to just 10 members, he added, according to the wire service.

The 12-person jury had previously lost one member to an illness and a second because that juror's mother suffered a heart attack. In fact, the juror whose wife just gave birth was an alternate who replaced the juror who fell ill.

The delay comes after two days of deliberations. On Friday the jury sent a note to Owen indicating "substantial disagreement on the issues" among the jurors.

Short Takes

He was accused of falsifying records to hide losses, according to the report, citing an SEC lawsuit filed last year in federal court. The discrepancies led to Golden Bear's overstating its construction revenue in 1997 by at least $25 million, or 85 percent, according to the lawsuit.

As a result of these actions, shareholders lost more than $49 million, according to published accounts.




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