Former Rite Aid Chief Counsel and Vice Chairman of the Board Re-Sentenced Today

The United States Attorney’s Office for the Middle District of Pennsylvania, announced that a former Rite Aid defendant was re-sentenced today to 90 months’ incarceration after a court hearing.

Rite Aid’s former chief counsel and vice chairman of the board, Franklin Brown, age 82, of Harrisburg, Pennsylvania, received the 90-month term from U.S. District Court Judge Sylvia Rambo. Rambo also ordered Brown to pay a $20,000 fine and to undergo two years’ supervised release following his release from confinement. The court directed Brown to report to the Bureau of Prisons to commence service of his new sentence on October 18, 2010.

Following a three-week jury trial, Brown was convicted in October of 2003, on 10 of 11 counts, including including conspiracy to defraud Rite Aid and the United States, conspiracy to obstruct justice, false statements to the SEC (five counts), obstruction of grand jury proceedings, obstruction of government agency proceedings (SEC), and tampering with a witness. One year later, on October 14, 2004, Brown was originally sentenced by Judge Rambo to 120 months’ imprisonment, two years’ supervised release, a $20,000 fine, and $1,000 in special assessments. Brown began serving his sentence on March 3, 2005.

Thereafter, Brown spent the next three years litigating motions for new trials, claiming the government had altered tape recorded conversations with Tim Noonan, Rite Aid’s former president. Ultimately, all of the motions were denied by Judge Rambo on February 22, 2008.

Finally, on February 23, 2010, the U.S. Court of Appeals for the Third Circuit filed a 64-page opinion affirming all of Brown’s convictions and Judge Rambo’s denials of his new trial motions. See United States v Brown, 595 F. 3d 498 (3d Cir. 2010). However, because Brown was sentenced before the Supreme Court decided United States v. Booker, 125 S.Ct. 738 (2005), the Third Circuit remanded the case back to Judge Rambo for a re-sentencing and consideration of the sentencing factors articulated by Congress under 18 U.S.C.§ 3553(a).

On August 16, 2010, Judge Rambo released Brown on bail pending re-sentencing. By that time Brown had served approximately 66 months of his 120-month sentence.

Brown’s trial in 2003 revealed he engaged in a pattern of fraud and obstruction of justice spanning a six-year time frame. Brown schemed with former CEO Martin Grass and former CFO Frank Bergonzi to manipulate Rite Aid’s reported earnings. Brown played a pivotal role, helping Bergonzi artificially inflate FY 1999 earnings with $93 million in unearned pharmaceutical rebate credits. The result was millions of dollars in shareholder losses that threatened the very existence of the third largest drug store chain in the world.

Brown’s crimes were not limited to accounting fraud. Grass and Brown’s bogus, back-dated severance letter scheme would have obligated Rite Aid to pay more than $12.7 million to six corporate officers, including Brown. Lucrative severance letters on Grass’ CEO letterhead were prepared by Brown and signed by Grass after Grass had resigned as CEO on October 18, 1999. Had the scheme not been thwarted, Brown would have been entitled to demand $4.39 million from the company when he retired. Moreover, Brown’s Amended and Restated Deferred Compensation Agreement, awarded to him by Grass without the knowledge or consent of the Company’s Board of Directors, would have paid Brown’s wife and/or her estate a minimum of $10,000,000.

Brown’s crimes were not confined to offenses against Rite Aid‘s shareholders. According to Peter J. Smith, the U.S. Attorney for the Middle District of PA, “Brown’s obstruction of justice struck at the very integrity of our criminal justice system.” Together, Brown and Grass encouraged three other Rite Aid employees, to swear oaths before a federal grand jury and repeatedly commit perjury.

During the sentencing hearing today Brown’s lawyer asked Judge Rambo to sentence him to time served based upon testimony from Brown’s treating cardiologist. According to the cardiologist, the Bureau for Prisons was incapable of providing competent medical care for Brown, who suffers from a variety of heart-related diseases. After hearing testimony from a Bureau of Prisons physician, Judge Rambo rejected the request and concurred with the government’s recommendation to sentence Brown to 90 months, six months longer than Grass’ 84-month sentence. Grass recently completed his sentence in January of this year. The government recommended the longer term for Brown because Grass pleaded guilty, accepted responsibility for his crimes, and cooperated with the government, while Brown did none of these things.

U.S. Attorney Smith noted the case was successfully investigated by the SEC in New York, NY and the Harrisburg Office of the FBI. The prosecution of Brown and the six other Rite Aid defendants was led by Assistant United States Attorney Kim Douglas Daniel.