U.S. Denies Ethics Violations in Rite Aid Probe

HARRISBURG, Pa. -- U.S. prosecutors have denied allegations that they broke ethics rules by using former Rite Aid Corp. President Timothy Noonan to make secret recordings of executives accused of accounting fraud.

Noonan taped former Chief Executive Martin Grass and ex-chief counsel Franklin Brown discussing the government’s probe last year of the third-largest drugstore chain. Grass, Brown and former Chief Financial Officer Frank Bergonzi were indicted in June on charges of obstructing justice and accounting fraud that led Rite Aid to restate $1.6 billion in profit.

Grass and Brown want a judge to bar the six tapes, claiming that prosecutors unethically used Noonan as a surrogate to question them when lawyers for both men opposed such interviews. Prosecutors said in court papers that informants may tape people obstructing justice, even if they have hired lawyers.

“In these tape-recorded conversations, Grass and Brown provide graphic evidence of an active, ongoing scheme to obstruct justice,” First Assistant U.S. Atty. Martin Carlson said in papers filed Oct. 4. “Even though Grass and Brown were represented by counsel, no ethics violation was occasioned by the government’s surreptitious recording of their conversations.”

Carlson said Grass and Brown cannot claim that having lawyers protected them before the indictment because Pennsylvania ethics rules don’t allow attorneys to further a continuing crime or fraud.

Noonan, 60, resigned in February 2000. Over the next year, he met with Brown and Bergonzi to thwart the company’s internal investigation and U.S. criminal and civil probes, Carlson wrote.

Noonan agreed in March 2001 to help prosecutors. He pleaded guilty July 10 to concealing the fraud from Rite Aid internal investigators.

He taped five meetings with Brown and one with Brown and Grass, Carlson wrote.

The tapes “reveal the men discussed the submission of false information to the FBI, the fabrication of contrived explanations for certain events, the backdating of documents” and the destruction of the computer that generated them.

Prosecutors allege that Rite Aid boosted its share price by 306% from 1995 through 1999 by overstating income and understating expenses. They claim that officers lied about company finances to the Securities and Exchange Commission, lenders and internal investigators.

Grass, Brown, Bergonzi and a fourth executive charged with conspiring to obstruct justice, Eric Sorkin, have pleaded not guilty. Trial is set for March 3.