Former Duane Reade Chief Anthony Cuti Convicted of Defrauding Investors

Former Duane Reade Inc. Chief Executive Officer Anthony Cuti was convicted of conspiracy and securities fraud for falsely inflating income at the drugstore chain and misleading investors.

Cuti and former Duane Reade Chief Financial Officer William Tennant, who was also convicted, were charged with engaging in a scheme to falsely increase revenue and lower expenses from 2000 to 2005. Cuti was convicted yesterday of both counts while Tennant was found guilty of securities fraud. The jury heard opening arguments on April 7.

U.S. District Judge Deborah Batts, who presided over the case, gave lawyers for both defendants 30 days to file motions papers seeking to set aside the verdict.

Reid Weingarten, a lawyer for Cuti, and John Kenney, a lawyer for Tennant, both declined comment about the verdict after court was adjourned.

Batts set Cuti’s sentencing for Nov. 15 and Tennant’s for Dec. 6. The judge permitted both men to remain free on bond until they were sentenced.

The two men inflated Duane Reade income through fraudulent real-estate transactions and expense reductions using fictitious credits from company vendors, prosecutors said.

“This is a case about fraud,” Assistant U.S. Attorney Jonathan Streeter said in his opening statement that day. “This case is about sham transactions designed to make it look like Duane Reade sales were higher than they actually were.”

‘Sleepy Chain’

Both men pleaded not guilty to the charges. During his 10 years as chief executive, Cuti expanded Duane Reade from a “sleepy chain of about 50 stores,” to more than 300, his defense lawyer Reid Weingarten told jurors in his opening statement.

The transactions were “arms-length business between sophisticated, self-interested people who knew exactly what they were doing and nothing more,” Weingarten said.

Weingarten told the jury that the transactions were reviewed by attorneys and accountants inside and outside of the company, including Duane Reade’s auditing firm, PricewaterhouseCoopers LLP. A PricewaterhouseCoopers spokesman, Steven Silber, declined comment.

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

Walgreen Purchase

Walgreen Co., the biggest U.S. drugstore chain, agreed to buy Duane Reade Holdings from affiliates of Oak Hill for $618 million in February.

The government alleged Cuti orchestrated the sham transactions while Tennant generally carried them out.

Cuti and Tennant benefited financially from the alleged scheme, prosecutors said. Cuti received more than $50 million from Duane Reade and Oak Hill from 2000 through 2005, including $25 million from the 2004 acquisition by Oak Hill, according to the indictment.

Tennant allegedly got a $2.8 million stock gain in 2001 after working on fraudulent real-estate transactions, the U.S. said.

Cuti left the company in 2005, where he also served as chairman and president. Tennant moved from chief financial officer to vice president of planning and logistics in 1999 and stayed until 2001. After that he was a consultant to the company, according to the indictment.

Cuti took part in the negotiations that resulted in Oak Hill’s purchase of Duane Reade, according to prosecutors. Oak Hill, based in Menlo Park, California, was given false financial information in those talks, the government said.

Walgreen received U.S. regulatory approval of the Duane Reade acquisition, the Deerfield, Illinois-based company said on March 30. The acquisition of 257 New York City-area stores closed in April.

The case is U.S. v. Cuti, 08-cr-00972, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.