The Securities and Exchange Commission charged a former CEO and a one-time CFO of drug store chain Duane Reade with fraud, saying they orchestrated elaborate multimillion-dollar accounting schemes that led the company to inflate earnings.

Filed in federal court in Manhattan, the center of the metropolitan area where Duane Reade is the largest drug-store operator, the SEC complaint alleges that the former CEO Anthony J. Cuti and former real estate administrator William J. Tennant, who also was at one point a CFO of the company, entered into a series of fraudulent transactions designed to boost reported income and to enable the company to meet quarterly and annual earnings guidance.

“This case demonstrates that pursuit of accounting fraud continues to be a priority of the Commission, which will hold corporate officials accountable for misconduct,” Scott Friestad, deputy director of the SEC’s Division of Enforcement, said.

Andrew M. Calamari, associate director of enforcement for the SEC’s New York regional office, added that the commission seeks to act “against corporate executives who fraudulently seek to manage earnings, whether through sham, round-trip transactions as alleged in this case, or other means.”

The complaint alleges that earnings were inflated from 2000 through 2004 using two types of transactions. Through “real estate concessions,” Duane Reade accepted payments for agreeing to relinquish “purportedly valuable leases or other real-estate rights.” Most of the transactions “involved round-trip payments in which Cuti persuaded counterparties to make payments to Duane Reade in exchange for his promise to repay them through other fictitious transactions.” Tennant, meanwhile, “prepared the false documentation used to implement the scheme,” the complaint said.

The second type of transaction, called “credit and rebilling,” like the real-estate scheme was “in reality a sham,” according to the SEC. In those deals, Cuti allegedly engineered different round-trip transactions, designing them to produce additional current income. At Cuti’s direction, the SEC charges, “Duane Reade vendors issued bogus credits to the company that were booked as a reduction to current expenses, resulting in a corresponding increase to current income.” Cuti also directed vendors to rebill Duane Reade for the credited amount in later periods, under fictitious invoices, however.

When Duane Reade later “paid the vendors for phantom services,” according to the complaint, “the fictitious credits were reversed. To disguise the connection between the invoice payments and the original credits, and to ensure that the payments could be capitalized and amortized, rather than charged against current income, Cuti allegedly had the vendors submit the fictitious invoices for work performed on a construction or maintenance project different from that on which the vendor had issued the credits.”

Duane Reade had disclosed in 2007 that it had received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York for documents related to certain real estate transactions. At that time, the company also announced that it would restate its results for 2000 through 2004.

Attempts by CFO.com to reach legal representatives for Cuti and Tennant were not immediately successful.

The SEC said that Duane Reade’s overstatement of pre-tax income totalled about $17.5 million. To “assure the success of the Real Estate Concession scheme in inflating reported income,” the SEC added, “Cuti and Tennant are alleged to have intentionally deceived the company’s CFO and other members of management.” Cuti’s false statements “omitted material facts in conversations with and written representations to the company’s independent auditors as to the true nature of the Real Estate Concession and Credit and Rebilling transactions,” the SEC said.

The commission is seeking to permanently enjoin Cuti and Tennant from future violations of the antifraud and other provisions of the federal securities laws. The agency also wants an order for financial penalties and disgorgement of ill-gotten gains, with prejudgment interest, and wants to bar the two from serving as officers or directors of companies.