The former Chairman of the Board and CEO of Duane Reade,
Inc., Anthony Cuti, was sentenced to serve a prison term of three years for
financial fraud. He was also ordered to pay a $5 million fine. Mr. Cuti was
convicted following a jury trial on one count of conspiracy to make false
statements in annual and quarterly SEC reports and to auditors, one count of
securities fraud and three counts of making false statements in SEC reports. U.S.
v. Cuti, No. 08-cr-00972 (S.D.N.Y.).
The charges are based on a scheme implemented by Mr.
Cutri and William Tennant, the former CFO of the company, to inflate the
financial results of Duane Reade from November 2000 through June 2005. The scheme
involved increasing the income of the company using fraudulent real estate
transactions while reducing expenses through the use of fictitious vendor
The real estate transactions involved the sale of
interests in leases and options on retail locations that were largely worthless
or which had already been sold by Duane Reade. To induce brokers and developers
to participate in these transactions Mr. Cutie executed side agreements under
which the purchasers were suppose to be reimbursed. Messrs. Cuti and Tennant
then devised other fraudulent schemes to funnel the money back to the brokers
and developers. Mr. Cutie mislead the outside auditors of Duane Reade about the
true nature of these transactions. He also failed to inform them that the purchasers
To reduce expenses and further inflate income Mr. Cutie
arranged to obtain false credits from vendors of the company. To induce the
vendors to issue the credits he and another company employee told the vendors
they could bill the Duane Reade for the amount of the credits in a latter
accounting period without doing any additional work.
Together both facets of the scheme artificially and
materially inflated the income of the company. This defrauded its public
shareholders and the private equity firm Oak Hill Capital Partners, L.P. which
took the company private in 2004.
Mr. Tennant, who was convicted on one count of securities
fraud at the same time Mr. Cutie was convicted is scheduled to be sentenced
August 29, 2011.
For more cutting edge commentary on
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