Lawsuit Tells How Fraud Worked

For those who wonder how a $350 million fraud and embezzlement scheme could have been perpetrated, the latest round of litigation in the Phar-Mor case is revealing.

Brought before U.S. District Court in Cleveland by Corporate Partners L.P., a limited partnership based in New York City that invests monies on behalf of pension funds and insurance companies, the lawsuit claims Coopers & Lybrand, Phar-Mor's former independent accounting firm, acted "recklessly" in performing company audits. Also named with Coopers, the "Big Six" firm Phar-Mor fired and also sued, are Giant Eagle Inc., Phar-Mor's largest shareholder, and David S. Shapira, chief executive officer of both Giant Eagle and Phar-Mor.

Neither Phar-Mor nor Mickey Monus, its former president accused of conspiring with former chief financial officer Pat Finn to carry out the fraud and embezzlement, are named in the lawsuit. The reason for the omissions, as the pleadings point out, is the assets of both Phar-Mor and Monus are separately under the protection of U.S. Bankruptcy Court and as such, civil litigation is automatically stayed.

Corporate Partners claims federal and state securities laws were violated--stock purchases were made on the basis of fraudulent financial statements--and seeks to recoup $200 million plus damages.

In June 1991, the investment firm purchased 8 million common shares of Phar-Mor--a 17 percent stake in the deep-discount drugstore chain--"and 4 million warrants to purchase common shares, for an aggregate consideration of $200 million," according to the pleadings. "At Shapira's and Phar-Mor's request, Corporate Partners agreed to allow $75 million of its investment to be used to repurchase Phar-Mor stock from certain shareholders. Shapira personally tendered 4 percent of his holdings, the maximum allowable for officers, receiving proceeds of nearly $2 million."

It was Shapira who solicited Corporate Partners, the lawsuit notes; " He! was seeking $125 million of equity capital to finance Phar-Mor's expansion and additional funds for a Phar-Mor stock repurchase that Shapira hoped would enable him to sell some of the Phar-Mor stock that he owned personally."

Representatives of Corporate Partners visited Phar-Mor's downtown Youngstown headquarters, met with Shapira and other executives and were handed a private placement stock memorandum that contained audited financial statements compiled by Coopers & Lybrand.

To conduct "due diligence"--the legal term for ensuring the picture Phar-Mor...