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First Rite-Aid official sentenced

| Wednesday, May 26, 2004

HARRISBURG -- A federal judge sentenced former Rite Aid Corp. Vice President Eric Sorkin to five months in prison and five months of home detention for lying about his role in a $1.6 billion accounting fraud.

U.S. District Judge Sylvia Rambo also sentenced Sorkin to two years of probation and fined him $5,000, First Assistant U.S. Attorney Martin Carlson said.

Sorkin is the first of five former Rite Aid executives who pleaded guilty to the fraud to be sentenced. In April, Rite Aid, the No. 3 U.S. drugstore chain, said fourth-quarter profit jumped more than eightfold after five years of losses and a housecleaning of top management.

The company's performance has improved following the management reshuffling, said Josh Rothe, of SKBA Capital Management in San Francisco, which owns Rite Aid shares among its $350 million in assets. "It's definitely doing better than it was," Rothe said.

Prosecutors will "refrain from any reaction" on the penalty meted out to Sorkin until all sentencing hearings in the case are complete, Carlson said in an interview. Former Chief Executive Martin Grass and former Chief Financial Officer Frank Bergonzi will be sentenced later this week. Both pleaded guilty to conspiring to inflate income at Rite Aid, which erased $1.6 billion in profit in July 2000.

Sorkin, who was indicted in June 2002, pleaded guilty to conspiring to obstruct justice. He admitted lying about his receipt of backdated severance letters signed by Grass, entitling Sorkin to $1.1 million. Sorkin got the letters in November 1999, just before authorities began investigating Rite Aid.

Sorkin worked at Rite Aid for 23 years and was executive vice president of pharmacy sales. He faced up to five years in prison and cut a deal with prosecutors in a bid for a lighter sentence.

Sorkin testified as a government witness in October at the trial of Franklin C. Brown, Rite Aid's former chief counsel and vice chairman. Brown was convicted of plotting with Grass to inflate income at Rite Aid and urging witnesses to lie. Sorkin said that Brown, who is appealing his conviction, gave him the letters signed by Grass.

Sorkin told jurors at Brown's trial that he lied to investigators at the urging of Brown, who repeatedly shaped a cover story on the severance letters, which were dated April 1999. Sorkin said he felt trapped by the lies Brown urged him to tell to internal investigators, prosecutors and grand jurors.

"I knew I was in this thing and there was no way out," Sorkin testified. "I was scared to death."

Sorkin, who earned $250,000 a year, said Brown gave him a letter that ensured him three years of salary and bonus. Sorkin said he asked if the benefits applied if he quit instead of being fired.

"I think I have another copy that may be a little clearer on that," Sorkin recalled Brown telling him. Sorkin got that letter a few days later, he testified.

Rambo set sentencing for today for Bergonzi and Philip Markovitz, a former vice president of real estate who pleaded guilty. Grass, who faces up to 10 years in prison, will be sentenced Thursday. Timothy Noonan, former president and chief operating officer, who also pleaded guilty, will be sentenced June 1.

Prosecutors say that Grass, Bergonzi, Noonan and Brown inflated income through a plan that boosted Rite Aid shares by 306 percent to $50.94 in January 1999. The stock plunged that year as Rite Aid failed to reach earnings targets. Grass left the company in October 1999.

Shares of Camp Hill-based Rite Aid rose 3 cents to close at $4.98 in New York Stock Exchange composite trading.

Rite Aid settled shareholder suits by paying $155 million in notes and $45 million in cash from insurers. The company also settled a civil fraud suit filed by the U.S. Securities and Exchange Commission and paid no penalty.

Rite Aid has set aside $20 million to cover the cost of a civil settlement that it is negotiating with the U.S. Attorney's office in Harrisburg. The company has paid about $25 million in legal fees associated with the misconduct, public filings show.

The company's former auditor, KPMG LLP, agreed in March 2003 to pay $125 million to Rite Aid shareholders.

Rite Aid is the third-largest U.S. pharmacy chain, behind Walgreen Co. and CVS Corp.

The case is: U.S. v. Martin Grass, 02-CR-146, U.S. District Court, Middle District of Pennsylvania (Harrisburg).

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