LawFuel – Legal Announcements – LEV L. DASSIN, the Acting United States Attorney for the Southern District of New York, and MARK J. MERSHON, the
Assistant Director-in-Charge of the New York Office of the
Federal Bureau of Investigation (“FBI”), announced that ANTHONY
CUTI, the former Chief Executive Officer (“CEO”), Chairman of the
Board, and President of Duane Reade, Inc. (“Duane Reade”), and
WILLIAM TENNANT, the former Chief Financial Officer (“CFO”) and
Senior Vice-President of Duane Reade, were indicted today for
allegedly perpetrating a scheme to falsely inflate the income and
reduce the expenses that Duane Reade reported to the investing
public and others. CUTI was also charged with making false
filings with the Securities and Exchange Commission (“SEC”).
According to the Indictment filed in Manhattan federal court:
From December 2000 through June 2005, CUTI and TENNANT
engaged in a scheme to misrepresent Duane Reade’s financial
performance in order to meet its own projections and the
expectations of professional securities analysts’ expectations
about the company’s financial performance. The scheme involved:
1) the reporting of inflated income from fraudulent real estate
transactions; and 2) the artificial reduction of expenses through
fictitious credits from vendors who did work for Duane Reade.
Real Estate Transactions
With respect to the real estate transactions, CUTI and
TENNANT engaged in fraudulent “Real Estate Concession
Transactions.” Pursuant to these transactions, Duane Reade sold
to various brokers, real estate developers, and landlords certain
real estate rights, including remaining time on leases and
options on retail locations. The rights being sold, however,
were largely worthless for various reasons, including that there
was little or no time left on the leases, the property subject to
the transactions was unusable, or Duane Reade had already sold
the right previously.
In order to convince various third parties — brokers,
developers and landlords — to participate in these fraudulent
transactions, CUTI promised, through various side agreements, to
pay the third parties back the cost of doing the transactions.
TENNANT and CUTI carried out these promises by engaging in
additional fraudulent transactions that were merely vehicles to
return money to the third parties.
In order to inflate reported income, CUTI and TENNANT
generally structured the fraudulent Real Estate Concession
Transactions so that Duane Reade could report income on them
immediately in the financial quarter in which Duane Reade faced a
shortfall on its own projections or analysts’ expectations.
Meanwhile, CUTI and TENNANT structured the fraudulent return
payments to the third parties so they would be treated as capital
expenditures, enabling Duane Reade to stretch those costs over a
long period of time.
CUTI and TENNANT misled Duane Reade’s auditors about
the Real Estate Concession Transactions by failing to disclose
that the real estate rights being sold were largely worthless and
by failing to inform the auditors that they were reimbursing the
brokers, developers, and landlords for participating in the
deals.
Fictitious Credits
CUTI also falsely inflated the income that Duane Reade
reported to the investing public in a second way, by engaging in
fraudulent “Credit-Rebilling Transactions.” In these
transactions, CUTI directed a co-conspirator not named in the
Indictment (“CC-1”), who was an employee of Duane Reade, to seek
fictitious credits from vendors who did work for Duane Reade. At
the same time, CUTI directed CC-1 to tell the vendors that they
could recover the money from the fictitious credits by rebilling
Duane Reade for the same amounts in later quarters without doing
any additional work. CUTI further told CC-1 that the vendors
should use language on the false rebillings that would allow
Duane Reade to treat the rebillings as capital expenditures. In
this way, Duane Reade could record the credits immediately but
stretch the cost of the rebillings over time.
These credits and rebillings were false because, as
CUTI knew, they did not reflect the true reasons for the credits
and the side agreements Duane Reade had struck with the vendors.
The false credits were used to decrease Duane Reade’s expenses,
which had the effect of increasing the net income reported to the
public.
As a result of both aspects of the scheme, materially
false and misleading information was provided to the investing
public, Duane Reade shareholders and auditors, and the SEC about
the company’s true income, expenses, earnings per share, and
other financial results. This information was contained in
Annual and Quarterly Reports filed with the SEC, in press
releases, and on conference calls held with securities analysts.
In addition, in July 2004, the private equity firm Oak Hill
Capital Partners, L.P. (“Oak Hill”), purchased all the publicly
traded stock of Duane Reade. Materially false and misleading
information was provided to Oak Hill during the negotiation of
this purchase. CUTI participated directly in those negotiations.
Through this scheme, CUTI and TENNANT caused Duane
Reade to report income that was inflated in a false and
misleading manner by approximately 10-15 percent between the last
quarter of its fiscal year in 2000 and Oak Hill’s acquisition in
July 2004.
CUTI and TENNANT achieved significant financial gain in
part pursuant to this scheme. CUTI negotiated lucrative
compensation packages with Duane Reade and Oak Hill. From 2000
through 2005, CUTI received more than $50 million in compensation
from Duane Reade and Oak Hill, including a pay-out of more than
$25 million in connection with Oak Hill’s acquisition. TENNANT,
from June through November 2001, after participating in numerous
fraudulent Real Estate Concession Transactions, exercised his
options to buy Duane Reade stock and received in excess of $2.8
million in gain.
The case is assigned to United States District Judge
DEBORAH A. BATTS. CUTI is expected to surrender and be arraigned
on the charges tomorrow. TENNANT is expected to surrender at a
later date.
The Indictment charges CUTI and TENNANT with one count
of conspiracy to commit securities fraud, make false statements
in annual and quarterly SEC reports, make false statements to
auditors, and make false entries in books and records; and one
count of securities fraud. It also charges CUTI with three
counts of making false filings with the SEC. The conspiracy
count carries a maximum sentence of 5 years in prison and a fine
of $250,000 or twice the gross gain or gross loss from the
offense. The securities fraud count and the false SEC filing
counts each carry maximum sentences of 20 years in prison and
fines of $5 million.
CUTI, 63, lives in Saddle River, New Jersey.
TENNANT, 61, lives in Richmond, Virginia.
Mr. DASSIN praised the investigative work of the FBI,
and thanked the SEC for their assistance.
“The defendants are alleged to have deceived the
investing public by providing false and misleading information
about Duane Reade’s financial condition while lining their own
pockets with millions of dollars in compensation,” said Acting
United States Attorney LEV L. DASSIN. “Corporate executives who
profit through fraud do so at the expense of public confidence in
our financial markets.”
“The FBI is committed to aggressively investigating
corporate fraud wherein self-dealing corporate executives design
schemes to deceive investors, auditors, and analysts about the
true financial condition of the corporation,” said Assistant
Director-in-Charge MARK J. MERSHON.
Assistant United States Attorneys JONATHAN R. STREETER
and JOAN M. LOUGHNANE are in charge of the prosecution.
The charges and allegations contained in the Indictment
are merely accusations, and the defendants are presumed innocent
unless and until proven guilty.
08-255 ###
