Prescription for Accounting Cases

A new wave of criminal investigations is expected in the wake of the credit crisis.

Federal prosecutors, meanwhile, appear to already have their hands full with financial cases. Today, two former top executives of the drugstore chain, Duane Reade Holdings Inc., were indicated on fraud charges

The two -- former chief executive, Anthony J. Cuti, 63, and one-time chief financial officer, William J. Tennant, 61 -- are accused of orchestrating a multi-million dollar accounting scheme that caused the company to inflate its reported earnings and overstate its income. The misrepresented Duane Reade's financial performance between December 2000 and June 2005, federal prosecutors in Manhattan say.

"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 Deputy U.S. Attorney Lev Dassin, in a statement.

Cuti, according to the indictment, also provided false information during negotiations leading to the July 2004 purchase of Duane Reade by private equity firm, Oak Hill Capital Partners.

The two men, prosecutors said, reported inflated income form fraudulent real estate transactions and artificially lowered expenses using fictitious credits from vendors who worked for Duane Reade.

As a result of such financial doctoring, the two executives "achieved significant financial gain," which, for Cuti, meant more than $50 million in compensation, including a payment of some $25 million after the takeover.

The Securities and Exchange Commission today also accused Cuti of filing false securities documents --overstating its pre-tax income by about $17.5 million. It is seeking civil penalties and forfeiture of ill-gotten gains.

Cuti's lawyer in the civil case, Jeffrey Sklaroff, said in a statement that the transactions were disputed and had no effect on stockholders, bondholders, the company, or Oak Hill.

"It is important to note that these old transactions were questioned only after Mr Cuti filed a claim against Duane Reade seeking to recover his sizeable investment in the company," he said, according to Reuters. "We vigorously deny the government's allegations."

Elizabeth Olson

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