Ex-Executive of Rite Aid Assisted Prosecutors in Building Fraud Case

A former president of Rite Aid Corp. made secret recordings for prosecutors of two top executives now under indictment for accounting fraud at the nation’s third-largest drugstore chain, court records show.

On six occasions last year, Timothy Noonan taped former Chief Executive Martin Grass and former Chief Counsel Franklin Brown discussing the investigation of Rite Aid, records show. Grass, Brown and ex-Chief Financial Officer Frank Bergonzi were indicted June 21 on charges of orchestrating a fraud that forced Rite Aid to restate $1.6 billion in profit.

A federal grand jury also accused Grass and Brown of conspiring to obstruct justice. The government’s case rests in part on tapes Noonan made one year after he resigned in February 2000. He pleaded guilty July 10 to charges he concealed the fraud from Rite Aid internal investigators.

Noonan agreed to cooperate with prosecutors in a bid for leniency at sentencing.

“The government’s obstruction case will rest substantially on certain tapes that the government made of conversations between a government informant, former Rite Aid officer Timothy Noonan and defendants Brown and Grass,” Brown’s attorney, Reid Weingarten, said in court papers in Harrisburg, Pa., last week.

Grass and Brown have asked a judge to bar use of the tapes, claiming that Assistant U.S. Atty. Kim Daniel violated Pennsylvania ethics rules in directing Noonan to make them. The executives claim that Daniel knew the defendants had retained attorneys in March 2001 who forbade them from discussing the case, and that the prosecutor used Noonan to surreptitiously conduct interviews.

During these sessions, “Noonan repeatedly steered the conversation to issues the government was interested in,” Brown and Grass argued. “In each of these instances Noonan, acting as AUSA Daniel’s surrogate, was actively interviewing Brown and Grass about issues under investigation.”

Daniel didn’t return calls seeking comment. Noonan attorney David Howard wouldn’t say when his client began cooperating.

“His cooperation was extensive,” Howard said. He also said he hadn’t seen the court papers submitted by defense attorneys and couldn’t comment on them.

Prosecutors allege that company profit, which helped boost share price by 306% from 1995 through 1999, was a “mirage” fabricated by top Rite Aid officers who overstated income and understated expenses.

Prosecutors claim that the Rite Aid executives lied about company finances to the Securities and Exchange Commission, bank lenders, former auditor KPMG and a law firm hired by Rite Aid’s audit committee in December 1999 to investigate fraud allegations.

Grass also is accused of hiding his transfer of $2.6 million in Rite Aid money to a real estate company he owned with his brother-in-law to buy 83 acres in Fairview Township, Pa. A vice president, Eric Sorkin, was charged with lying to a grand jury and conspiring to obstruct justice.

The SEC, which called the case one of the most egregious accounting frauds ever, filed a civil suit against Grass, Bergonzi and Brown. The commission also settled separate cases against Rite Aid and Noonan.

Although the indictment refers only to recorded conversations without naming the informant, court papers filed by defense attorneys specifically said that Noonan helped make the tapes. Noonan, 60, was a corporate officer for nearly three decades who rose to chief operating officer and president.

He was one of Rite Aid’s four top officers, along with Grass, Brown and Bergonzi.

Noonan taped Brown alone five times from March 13, 2001, to May 21, 2001, records show. He once taped Brown and Grass, whose father, Alex Grass, founded the company in 1962. At one session, Brown pledged “his life, his trust, and his sacred honor” to Noonan, unaware of his colleague’s role as an undercover informant, records show.

Brown and Grass also discussed with Noonan backdated severance agreements they wanted to hide from prosecutors, the indictment alleges. Grass allegedly told Noonan that investigators “do not have and never will have” the computer used to generate the severance agreements, “unless they use a Trident submarine.”

Prosecutors gave defense attorneys copies of the tapes as part of the pretrial exchange of evidence. Lawyers for the defendants filed transcripts of the tapes under seal with U.S. District Judge Yvette Kane, court records show.

Shares of Camp Hill, Pa.-based Rite Aid rose 9 cents to $2.34 Tuesday on the New York Stock Exchange.