Rite Aid Tells All After The Storm Breaks

An SEC filing details family ties to the drugstore chain

At first, Rite Aid Corp. dismissed the allegations in a November lawsuit by a former employee. The charges involved alleged conflicts of interest arising from Rite Aid's dealings with companies whose owners included members of the family of Alex Grass, Rite Aid's founder. In a Jan. 20 letter to BUSINESS WEEK, after the company was asked about the litigation filed by former Executive Vice-President Kevin J. Mann, Rite Aid CEO Martin L. Grass, son of Alex wrote: "I should reiterate that I do not own any interest, whether equity or income rights, in any entity which does business with Rite Aid Corp."

In the last few weeks, however, Rite Aid has been shedding new light on the Grass family's ties to the $12.6 billion drugstore chain--after the connections began to surface, starting with a Wall Street Journal story on Jan. 29. In a Feb. 9 8K filing with the Securities and Exchange Commission, the company disclosed connections between Rite Aid and several businesses and a real estate venture in which Grass family members have stakes. That filing came six days after BUSINESS WEEK, as part of a two month investigation, asked Rite Aid about documents the magazine obtained showing that Martin Grass's sisters were investors in a brokerage that sold goods to Rite Aid. And the 8K comes after Rite Aid acknowledged, in response to the Journal story, that CEO Grass had interests in partnerships that own two properties on which Rite Aid has operated stores.

Rite Aid declined to comment on whether the relationships outlined in the Feb. 9 filing should have been disclosed earlier. In a Jan. 13 interview with BUSINESS WEEK, Grass did acknowledge his interest in one property but said it was "below the threshold" that required disclosure.

The Feb. 9 filing says the matters surfaced after Martin Grass requested an internal review following the Wall Street Journal article. That review, the filing says, found no previously undisclosed business relationships between Grass and Rite Aid.

A PATTERN? Corporate governance experts say it's unusual to have so many ties between a longtime public company and the founding family. "The sheer number is unusual," says Charles M. Elson, professor of law at Stetson University. "It is a pattern that could make shareholders uncomfortable."

BUSINESS WEEK's inquiry into Rite Aid's ties to the Grass family began shortly after Mann filed suit. Mann, who had managed the chain's purchasing functions, alleged that his firing in June, 1998, and a subsequent company probe of his relationships with Rite Aid purchasing brokers, was an excuse to ax the broker system. Mann also alleges that, with Martin Grass's knowledge, Rite Aid bought more than $50 million a year from companies in which Grass family members have an interest.

Rite Aid has moved to have Mann's suit dismissed. In November, after the suit had been filed, Rite Aid Vice-Chairman Franklin C. Brown told BUSINESS WEEK that Mann's allegations were groundless. As for Mann's dismissal, Martin Grass said in the Jan. 13 interview, "He was replaced, we've said all along, for performance."

But documents obtained by BUSINESS WEEK in early February show that Elizabeth Grass Weese and Linda Grass Shapiro, sisters of Martin Grass, have been shareholders of a brokerage, The Crestpointe Corp., that represented manufacturers selling to Rite Aid. Kevin Mann's brother, William A. Mann III, was listed as president. Crestpointe represented companies selling $40 million to $50 million a year to Rite Aid, William Mann says. Crestpointe was paid by the manufacturers, not by Rite Aid. "Over the years I conducted business with the buyers and category managers at Rite Aid, not Kevin," he says. "This fact was known to Rite Aid top management, including Martin Grass."

OTHER TIES. When BUSINESS WEEK first asked about Crestpointe, company Vice-Chairman Brown responded on Feb. 3 that he and Martin Grass had never heard of the company. Brown added that he and Grass knew of no connection between Crestpointe and Ms. Shapiro and Ms. Weese. When asked about Crosspointe the same day, Linda Grass Shapiro said, "You can talk to my brother." Elizabeth Grass Weese could not be reached.

The following week, in the 8K filing, Rite Aid said it had learned that Ms. Weese and Ms. Shapiro each held 12.5% stakes in Crestpointe. Rite Aid also said it had uncovered other ties between the Grass family and the company. In 1992, for example, Alex Grass directed that stakes he and Martin Grass were turning back to a company called I.C. Imports be issued to his daughters. The small importer of toothbrushes and other items from Israel sold over $1 million annually to Rite Aid in recent years.

Franklin Brown, vice-chairman at Rite Aid, wrote in January that the board knew of Martin and Alex's investment in I.C. Imports, but it struck him as "insignificant." "On reflection," Brown wrote, "I should have sharpened my inquiries and made a proxy disclosure." Alex Grass, Ms. Weese, and Ms. Shapiro did not return calls seeking comment on I.C.

Rite Aid's proxies over the last three years do not mention the Grass ties to Crestpointe or I.C. Imports. Perhaps in the future, those filings will provide a more interesting read.

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