Martin Grass was born in 1964 and grew up in Harrisburg, Pennsylvania. After graduating from the University of Pennsylvania and doing an MBA at Cornell, he started working for Rite Aid, the pharmacy chain set up by his father, Alex, in 1962. In 1989 he was arrested for attempting to bribe a member of the Ohio state pharmacy board to step down in exchange for $33,000, although he was ultimately acquitted 15 months later when a judge ruled that the prosecution’s evidence was “circumstantial”. Despite this scandal, he took over from his father as both CEO and chairman of Rite Aid in 1995.
What was the scam?
When Martin Grass took over, Rite Aid was one of the largest pharmacy chains in America. Grass wanted to expand further, borrowing heavily to fund a string of acquisitions. In order to keep the share price soaring, despite mounting problems making repayments on this debt, Grass started to fiddle the books, using fake contracts (including with his brother-in-law’s firm) to make revenue and profits appear higher than they were. He also booked income prematurely, extended the period over which assets were depreciated and incorrectly recorded payments for medicine ordered but never collected.
What happened next?
The gap between the stated financials and reality grew so big that by October 1999 Rite Aid was forced to restate its earnings between 1997 and 1999, and lower its guidance for future profits, causing its shares to plunge by more than three-quarters. Grass was forced to resign, though it was later revealed that, even after he quit, he colluded to forge backdated documents giving several Rite Aid executives generous severance payments. He was charged with fraud in 2002 and sentenced in 2004 to eight years in jail.
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Lessons for investors
Investigations revealed that Grass’s deceptions inflated profits by $1.6bn between 1997 and 1999. Rite Aid’s shares were trading at more than $50 at the start of 1999, but they fell to less than $10 a share by the end of the year, wiping more than $40bn off their value. At one point in 2009 they were trading at just $0.25. Borrowing large sums of money to fund expansion can work, but it can also create pressures on CEOs to cut corners. More generally, studies suggest that shares of firms with higher levels of debt tend to underperform.
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