Read the first Contrite Executive Watch for an explanation of the column.
Contrite executive: Franklyn Bergonzi, former chief financial officer of drug-store chain Rite Aid Corp. Bergonzi, a 29-year veteran of the company, served as CFO from 1995 to 1999.
Venue: The courtroom of U.S. District Senior Judge Sylvia Rambo, Harrisburg, Pa. Thursday, June 4, 2003.
The road to contrition: Before Enron, WorldCom, and HealthSouth, Rite Aid was the ne plus ultra of accounting fraud. In the late '90s, the government has alleged, executives at the chain—including CEO Martin Grass—routinely overstated earnings. Bergonzi left the company in 1999 after Rite Aid made a small earnings restatement. But in 2000, when a new regime took over, the company restated earnings by a whopping $1.6 billion, at the time the largest such restatement in history. In June 2002, a 37-count federal indictment implicated Bergonzi and other senior Rite Aid managers in a plethora of schemes intended to inflate earnings. The trial of Bergonzi, former CEO Grass, and former General Counsel Franklin Brown was scheduled to begin next Monday. But yesterday, Bergonzi pleaded guilty to one felony count.
Words of contrition: According to Bergonzi's attorney, Ira Raphaelson of O'Melveny & Myers, Bergonzi told the court: "I am sorry. As CFO of Rite Aid I should have served as a gatekeeper on aggressive accounting. Instead, as the end of fiscal year 1999 approached, I was aggressive and pressured others to be aggressive in finding earnings and omitting expenses in what was ultimately a failed effort by myself, Martin Grass, Tim Noonan, Franklin Brown, and others to meet the earnings expectations of Wall Street."
Raphaelson also released the following statement on Bergonzi's behalf: "Mr. Bergonzi expressed sorrow for what happened at Rite Aid, and for the role he played in undermining confidence in that company. To his everlasting regret, he engaged in aggressive accounting practices that distorted the books and records of Rite Aid at a time when pressure from Wall Street on corporate America to meet earnings expectations apparently caused too many CFOs to forget their gatekeeper responsibilities. He is relieved to be taking this step to putting these last four years behind him."
Deeds of contrition: Bergonzi pleaded guilty to a single charge of conspiracy, which, according to the Wall Street Journal, carries a sentence of up to five years in jail and a fine that could reach $250,000. Under the plea agreement, Bergonzi will cooperate with the government as it continues to prosecute other former Rite Aid executives. "If the trial goes forward, he'll be a witness," said Raphaelson.
So how contrite is he? Bergonzi is what you might call a highly motivated penitent. His trial was slated to start on Monday. Former Chief Operating Officer Timothy Noonan had already taken a plea and was cooperating.In return for Bergonzi's plea and cooperation, the government will move for a lower sentence and dismiss the remainder of the counts against him. The former CFO gains points for forthrightly acknowledging that he committed a crime, that he failed to live up to his responsibilities, and that he hurt shareholders and the company. But Bergonzi gets demerits for trying to shift some of the onus away from him and onto Wall Street. After all, the primary beneficiaries of Rite Aid meeting Wall Street's expectations were the insiders, who owned tons of stock and options. And Raphaelson's comment that "pressure from Wall Street" caused "too many CFOs" to abdicate their professional responsibilities rings hollow. Of the thousands of public companies, only a few engaged in the sort of blatant cheating that Rite Aid did. A truly contrite executive wouldn't make the everybody-else-was-doing-it excuse.
Overall grade*: 5.
*Graded on a 1 to 10 scale, where 1 is a full-denial Jeffrey Skilling and 10 is a tearful Japanese CEO resignation.