SEC Charges Former Duane Reade Executives with Accounting Fraud

FOR IMMEDIATE RELEASE
2008-248

Washington, D.C., Oct. 9, 2008 — The Securities and Exchange Commission today charged two former senior executives at Duane Reade with fraud for orchestrating multi-million dollar accounting schemes that caused the company to inflate its reported earnings and overstate its net income. Duane Reade is the operator of the largest chain of drug stores in the New York Metropolitan area.

The SEC's complaint, filed in federal court in Manhattan, alleges that the former Duane Reade executives entered into a series of fraudulent transactions designed to boost reported income and enable the company to meet quarterly and annual earnings guidance. According to the SEC's complaint, the fraudulent transactions were designed by the company's former CEO, Anthony J. Cuti, and primarily implemented by its former Real Estate Administrator and one-time CFO, William J. Tennant.

"This case demonstrates that pursuit of accounting fraud continues to be a priority of the Commission, which will hold corporate officials accountable for misconduct," said Scott Friestad, Deputy Director of the SEC's Division of Enforcement.

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "The Commission is committed to taking action against corporate executives who fraudulently seek to manage earnings, whether through sham, round-trip transactions as alleged in this case, or other means."

The SEC's complaint alleges that the earnings inflation scheme lasted from 2000 through 2004, and involved two kinds of transactions: the "Real Estate Concession" transactions and the "Credit and Rebilling" transactions. The Real Estate Concession transactions involved payments to Duane Reade for its agreement to relinquish purportedly valuable leases or other real-estate rights. The complaint alleges that these agreements were in reality a sham and that most transactions involved round-trip payments in which Cuti persuaded counterparties to make payments to Duane Reade in exchange for his promise to repay them through other fictitious transactions. The complaint further alleges that Tennant prepared the false documentation used to implement the scheme.

In the Credit and Rebilling scheme, Cuti allegedly engineered different round-trip transactions that he designed to produce additional current income. The SEC's complaint charges that, at Cuti's direction, Duane Reade vendors issued bogus credits to the company that were booked as a reduction to current expenses, resulting in a corresponding increase to current income. However, Cuti also directed these vendors to rebill Duane Reade for the credited amount in later periods under fictitious invoices. Accordingly, when Duane Reade later paid the vendors for phantom services, the fictitious credits were reversed. To disguise the connection between the invoice payments and the original credits, and to ensure that the payments could be capitalized and amortized, rather than charged against current income, Cuti allegedly had the vendors submit the fictitious invoices for work performed on a construction or maintenance project different from that on which the vendor had issued the credits.

According to the SEC's complaint, these schemes together caused Duane Reade to overstate its pre-tax income by a total of approximately $17.5 million. To assure the success of the Real Estate Concession scheme in inflating reported income, Cuti and Tennant are alleged to have intentionally deceived the company's CFO and other members of management. Cuti also allegedly made false statements and omitted material facts in conversations with and written representations to the company's independent auditors as to the true nature of the Real Estate Concession and Credit and Rebilling transactions.

The SEC seeks a final judgment permanently enjoining both Cuti and Tennant from future violations of the antifraud and other provisions of the federal securities laws and ordering them to pay civil penalties and disgorgement of ill-gotten gains with prejudgment interest. The SEC also seeks a judgment barring them from serving as officers or directors of any public company.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigations in this matter.

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For more information, contact:

Andrew M. Calamari
Associate Director, Enforcement
(212) 336-0042

Leslie Kazon
Assistant Director, Enforcement
(212) 336-0107

http://www.sec.gov/news/press/2008/2008-248.htm