The former CEO and CFO of drug store chain Duane Reade were indicted on fraud charges for allegedly inflating the company's income.

Former CEO Anthony J. Cuti, and former real estate administrator and one-time CFO William J. Tennant, were charged with securities fraud, making false entries in books and records, and making false statements to the Securities and Exchange Commission and auditors.

The SEC also charged the two former executives with accounting fraud. The SEC alleged that that they entered into a series of fraudulent transactions designed to enable the company to meet its quarterly and annual earnings guidance. The SEC said the scheme lasted from 2000 through 2004, and involved two types of transactions: real estate concession transactions and credit and rebilling transactions.

The real estate concession transactions involved payments to Duane Reade for its agreement to relinquish purportedly valuable leases or other real-estate rights. The complaint alleges that the agreements were a sham and that most of the transactions involved round-trip payments in which Cuti persuaded counterparties to make payments to Duane Reade in exchange for his promise to repay them through other fictitious transactions. The complaint further alleges that Tennant prepared the false documentation.

In the credit and rebilling scheme, Cuti allegedly engineered different round-trip transactions that he designed to produce additional current income. The SEC's complaint charges that, at Cuti's direction, Duane Reade vendors issued bogus credits to the company that were booked as a reduction to current expenses, resulting in a corresponding increase to current income. However, Cuti also directed these vendors to rebill Duane Reade for the credited amount in later periods under fictitious invoices. Accordingly, when Duane Reade later paid the vendors for phantom services, the fictitious credits were reversed.

According to the SEC, these schemes together caused Duane Reade to overstate its pre-tax income by approximately $17.5 million.

Duane Reade noted that its audit committee has conducted an investigation and the company has restated its financial results for the period in question.

"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," said Duane Reade chairman and CEO John Lederer in a statement.

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