SEC Launches Probe Into Finances of Ailing Rite Aid

The Securities and Exchange Commission is launching a formal probe into Rite Aid Corp.’s finances, the ailing pharmacy retailer said in a Thursday public filing.

Neither Rite Aid nor the SEC provided details about the probe, the latest in a string of bad news from the nation’s second-largest drug retailer.

In its SEC filing, Rite Aid also described events leading to the resignation of its auditor earlier this week. Rite Aid said KPMG International complained in June about inadequate accounting systems of the Camp Hill, Pa.-based chain and declared in writing that it would not sign quarterly reports until changes were made.

KPMG also claimed, according to Rite Aid, to have warned in June that it was “no longer willing to rely on representations made by the then-serving chief financial officer”--an assertion Rite Aid directors deny was ever made. CFO Frank Bergonzi was replaced in mid-July.

When it resigned last week, KPMG said it could no longer rely on the financial data Rite Aid supplied.

A KPMG spokesman on Thursday would say only that the accounting firm intends to respond to Rite Aid’s filing.

“I think that it’s open season on Rite Aid right now,” said Mark Husson, an analyst with Merrill Lynch & Co. in New York.

Rite Aid, with 3,800 stores nationwide, is in the process of restating for the second time earnings for the last three fiscal years. Martin Grass, chief executive and son of Rite Aid’s founder, resigned in October. Los Angeles buyout specialist Leonard Green, who controls 11% of Rite Aid shares, became CEO on Monday.

Green, who couldn’t be reached, said in a statement Thursday that Rite Aid “has addressed and is addressing aggressively” the issues raised by KPMG.

According to Rite Aid’s filing, KPMG had broad complaints about the drugstore chain’s accounting procedures. It said Rite Aid didn’t have enough qualified accountants, lacked proper accounting systems and needed better documentation.

KPMG also had concerns about how Rite Aid accounted for out-of-date goods returned to vendors.

Rite Aid in July settled for $1.4 million charges it had sold expired products in stores throughout California.

On Thursday, Rite Aid’s stock eased 13 cents to $6.88 on the New York Stock Exchange. It has tumbled from $51.13 in January.

“We don’t know what else could happen to this company, but do we think that $6 is the bottom?” asked Husson. “Not necessarily.”