FORMER DUANE READE CEO SENTENCED IN MANHATTAN FEDERAL COURT FOR SECURITIES FRAUD – US LAW NEWSWIRE

United States Attorney
Southern District of New York
FOR IMMEDIATE RELEASE CONTACT: U.S. ATTORNEY’S OFFICE
AUGUST 22, 2011 ELLEN DAVIS,
PREET BHARARA, the United States Attorney for the
Southern District of New York, announced that ANTHONY CUTI, the
former Chief Executive Officer (“CEO”), Chairman of the Board,
and President of Duane Reade, Inc. (“Duane Reade”) was sentenced
today in Manhattan federal court to three years in prison for
perpetrating a scheme to falsely inflate the income and reduce
the expenses that Duane Reade reported. CUTI was convicted in
June 2010 after a two-month jury trial. U.S. District Judge
DEBORAH A. BATTS imposed today’s sentence.
U.S. Attorney PREET BHARARA stated: “Anthony Cuti’s
breach of his fiduciary duty to Duane Reade, its board of
directors, auditors, and investors was as egregious as it was
audacious. He will now have to live with the consequences of his
actions.”
According to the Indictment and evidence presented at
trial:
From November 2000 through June 2005, CUTI and WILLIAM
TENNANT, the former Chief Financial Officer (“CFO”) and Senior
Vice President of Duane Reade, engaged in a scheme to
misrepresent Duane Reade’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
CUTI and TENNANT engaged in fraudulent real estate
transactions that Duane Reade sold to various brokers and real
estate developers. Specifically, they sold real estate rights,
including remaining time on leases and options on retail
locations that 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 rights. Accordingly, the income
received for the sale of the real estate rights was not real
income but rather fraudulently generated income.
In order to convince the brokers and developers to
participate in these fraudulent transactions, CUTI promised,
through various side agreements, to reimburse the third parties
for the costs of 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.
CUTI misled Duane Reade’s auditors about the real
estate transactions by failing to disclose that they were largely
worthless, and by failing to inform them that he was reimbursing
the brokers and developers for participating in the deals.
Fictitious Credits
CUTI also falsely inflated the income that Duane Reade
reported to the investing public by engaging in fraudulent vendor
credit transactions. In these transactions, CUTI directed coconspirator
JERRY RAY, who was a Senior Vice President at Duane
Reade, to seek fictitious credits from vendors who did work for
the company. At the same time, CUTI directed RAY 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. 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 about the company’s true income
and other financial results was provided to the investing public,
Duane Reade shareholders and auditors, the SEC, and the private
equity firm Oak Hill Capital Partners, L.P. (“Oak Hill”)that
purchased Duane Reade’s publicly traded stock and took the
company private in 2004.
On June 8, 2010, the jury found CUTI guilty of one
count of conspiracy to make false statements in annual and
quarterly SEC reports and to auditors, and to make false entries
in the books and records of Duane Reade; one count of securities
fraud; and three counts of making false statements in SEC
reports. The jury also found TENNANT guilty of one count of
securities fraud.
* * *
In addition to the prison term, Judge BATTS sentenced
CUTI, 65, of Saddle River, New Jersey, to three years of
supervised release. CUTI was also ordered to pay a $5 million
fine and a $500 special assessment fee. Restitution will be
determined at a later date.
TENNANT, 64, of Richmond, Virginia, is scheduled to be
sentenced by Judge BATTS on August 29, 2011, at 2:30 p.m.
RAY, 63, previously pled guilty to conspiracy,
cooperated with the Government, and testified as a Government
witness at CUTI’s and TENNANT’s trial. He will be sentenced at a
later date.
Mr. BHARARA praised the work of the Federal Bureau of
Investigation and thanked the United States Securities and
Exchange Commission for its assistance with this case.
This case was brought in coordination with President
BARACK OBAMA’s Financial Fraud Enforcement Task Force, on which
Mr. BHARARA serves as a Co-Chair of the Securities and
Commodities Fraud Working Group. President OBAMA established the
interagency Financial Fraud Enforcement Task Force to wage an
aggressive, coordinated, and proactive effort to investigate and
prosecute financial crimes. The task force includes
representatives from a broad range of federal agencies,
regulatory authorities, inspectors general, and state and local
law enforcement who, working together, bring to bear a powerful
array of criminal and civil enforcement resources. The task
force is working to improve efforts across the federal executive
branch, and with state and local partners, to investigate and
prosecute significant financial crimes, ensure just and effective
punishment for those who perpetrate financial crimes, combat
discrimination in the lending and financial markets, and recover
proceeds for victims of financial crimes.
Assistant United States Attorneys JONATHAN R. STREETER,
REBECCA MONCK RICIGLIANO, and Special Assistant United States
Attorney LUKE M. FITZGERALD are in charge of the prosecution.
11-254 ###
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