The former Chairman of the Board and CEO of Duane Reade, Inc., Anthony Cuti, was sentenced to serve a prison term of three years for financial fraud. He was also ordered to pay a $5 million fine. Mr. Cuti was convicted following a jury trial on one count of conspiracy to make false statements in annual and quarterly SEC reports and to auditors, one count of securities fraud and three counts of making false statements in SEC reports. U.S. v. Cuti, No. 08-cr-00972 (S.D.N.Y.).

The charges are based on a scheme implemented by Mr. Cutri and William Tennant, the former CFO of the company, to inflate the financial results of Duane Reade from November 2000 through June 2005. The scheme involved increasing the income of the company using fraudulent real estate transactions while reducing expenses through the use of fictitious vendor credits.

The real estate transactions involved the sale of interests in leases and options on retail locations that were largely worthless or which had already been sold by Duane Reade. To induce brokers and developers to participate in these transactions Mr. Cutie executed side agreements under which the purchasers were suppose to be reimbursed. Messrs. Cuti and Tennant then devised other fraudulent schemes to funnel the money back to the brokers and developers. Mr. Cutie mislead the outside auditors of Duane Reade about the true nature of these transactions. He also failed to inform them that the purchasers were reimbursed.

To reduce expenses and further inflate income Mr. Cutie arranged to obtain false credits from vendors of the company. To induce the vendors to issue the credits he and another company employee told the vendors they could bill the Duane Reade for the amount of the credits in a latter accounting period without doing any additional work.

Together both facets of the scheme artificially and materially inflated the income of the company. This defrauded its public shareholders and the private equity firm Oak Hill Capital Partners, L.P. which took the company private in 2004.

Mr. Tennant, who was convicted on one count of securities fraud at the same time Mr. Cutie was convicted is scheduled to be sentenced August 29, 2011.

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