Anthony Cuti, former CEO, Chairman of the Board, and president of Duane Reade, Inc. was found guilty by a Manhattan jury of perpetrating a scheme to falsely inflate the income and reduce the expenses that Duane Reade reported.
From November 2000 through June 2005, Cuti and others reportedly engaged in a scheme to misrepresent Duane Reade's financial performance. The scheme involved: the reporting of inflated income from fraudulent real estate transactions; and the artificial reduction of expenses through fictitious credits from vendors who did work for Duane Reade.
With respect to the real estate transactions, Cuti and colleagues engaged in fraudulent transactions pursuant to which Duane Reade sold to various brokers and real estate developers real estate rights, including remaining time on leases and options on retail locations. The rights being sold, however, 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 previously. Accordingly, the income received for the sale of the real estate rights was not real income but rather fraudulently generated income.
CUTI and colleagues reportedly misled Duane Reade's auditors about the real estate transactions by failing to disclose that the real estate rights being sold were largely worthless and by failing to inform the auditors that they were reimbursing the brokers and developers for participating in the deals. The jury found Cuti guilty of one count of conspiracy to make false statements in annual and quarterly SEC reports, to make false statements 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 conspiracy count carries a maximum sentence of five years in prison and a fine of $250,000 or twice the gross gain or gross loss from the offense. The securities fraud count and the false SEC filing counts each carry maximum sentences of 20 years in prison and fines of $5 million.