Oct. 9 (Bloomberg) -- Duane Reade Inc. former Chief Executive Officer Anthony Cuti and former Chief Financial Officer William Tennant were indicted for securities fraud.

Cuti, 63, and Tennant, 61, were accused today of perpetrating a scheme to falsely inflate income and reduce expenses that the company, the largest drugstore chain in New York City, reported to investors, according to a statement by the U.S. Attorney's Office in New York.

``The defendants are alleged to have deceived the investing public by providing false and misleading information about Duane Reade's financial condition while lining their own pockets with millions of dollars in compensation,'' Deputy U.S. Attorney Lev Dassin said in the statement.

The inflated income came through fraudulent real estate transactions and the expense reductions through fictitious credits from company vendors, the prosecutors said. Duane Reade sold real-estate rights that were ``largely worthless,'' according to prosecutors.

Cuti left the drugstore chain in 2005 after more than nine years as CEO. He had also been chairman and president. Tennant moved from chief financial officer to vice president of planning and logistics in 1999 and stayed until 2001.

Oak Hill

Cuti took part in the negotiations with Oak Hill Capital Partners LP that resulted in the private-equity firm buying Duane Reade in July 2004, according to prosecutors. Oak Hill, based in Menlo Park, California, was given false financial information in those talks, the government said.

M. Lin-Hua Wu, a spokeswoman for Oak Hill, declined to comment on that accusation.

The scheme lasted from 2000 to 2005, according to the indictment. During that period, Cuti, of Saddle River, New Jersey, received more than $50 million from Duane Reade and Oak Hill, including $25 million because of the 2004 acquisition.

Tennant, of Richmond, Virginia, got a $2.8 million stock gain in 2001 after working on fraudulent real-estate transactions, according to prosecutors.

In addition to securities fraud, the two were charged with conspiracy to commit securities fraud and to make false statements and false book entries. Cuti also was charged with making false filings to the U.S. Securities and Exchange Commission.

SEC Suit

The SEC filed a civil lawsuit today against Cuti and Tennant seeking to fine them, make them forfeit ``ill-gotten gains'' and bar them from serving as officers or directors of a public company.

The SEC accused Cuti of engineering the scheme with assistance from a real estate brokerage and an employee, who persuaded maintenance and construction vendors to participate. The regulator didn't identify any of them in the complaint.

``The investigation is ongoing,'' said Andrew Calamari, an SEC enforcement official in New York who is overseeing its probe. He declined to comment further.

Cuti's lawyer in the SEC case, Jeffrey Sklaroff of Greenberg Traurig in New York, denied the allegations and said his client would be vindicated.

``The cases filed by the government today cover disputed historical transactions, many of which occurred almost seven years ago and which did not affect Duane Reade's stockholders, bondholders, the company itself or its private-equity owner, Oak Hill Capital Partners,'' Sklaroff said in an e-mailed statement.

`Old Transactions'

``These old transactions were questioned only after Mr. Cuti filed a claim against Duane Reade seeking to recover his sizeable investment in the company,'' Sklaroff said.

In September 2006, Cuti initiated an arbitration proceeding against the company, accusing it of breach of contract and failure to make payments related to his November 2005 termination, according to a June 28 Duane Reade regulatory filing. The company filed counterclaims and defenses alleging he was responsible for improper practices that led to financial misstatements.

A stay was granted in the proceedings pending the U.S. attorney's investigation, according to the filing.

Court Appearance

Cuti is expected to make a court appearance tomorrow in the criminal case and Tennant at a later date, according to the prosecutors' statement.

``Duane Reade has cooperated fully with the various government agencies in their investigations over the last 16 months and we are pleased to see this issue reach resolution,'' Duane Reade Chairman and Chief Executive Officer John Lederer said in a statement. ``We are gratified that the government has concluded its investigation with no finding of any wrongdoing by the company or any of its current executives.''

The company disclosed in May 2007 an internal investigation that resulted in the restating of financial results, Lederer said.

Duane Reade, founded in 1960, was named after the two Manhattan streets where it was located. Bain Capital LLC bought the drugstore chain from brothers Abraham, Eli and Jack Cohen in 1992 and sold shares to the public in 1998. Oak Hill bought all the publicly traded shares in 2004.

248 Stores

The company had 248 stores in the New York metropolitan area in 2006 and $1.6 billion in sales for fiscal year 2006, according to its Web site.

Cuti's criminal lawyer, Reid Weingarten of Steptoe & Johnson in Washington, didn't immediately return a call seeking comment. Tennant's lawyer, John Kenney of Hoguet Newman Regal & Kenney in New York, didn't immediately return a call seeking comment.

The criminal case is U.S. v. Cuti, 08-cr-972, U.S. District Court, Southern District of New York (Manhattan).

The SEC case is SEC v. Cuti, 08-cv-8648, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Thom Weidlich in New York federal court at tweidlich@bloomberg.net.

Last Updated: October 9, 2008 17:32 EDT