2003-08-19 -- Medi-Hut-- Plea-- News Release

NEWARK, N.J. - Three former executives of Medi-Hut Co., Inc., including the Chief Executive Officer, Chief Financial Officer and Vice President of Sales and Marketing, pleaded guilty today to a conspiracy to inflate the revenue and earnings of the New Jersey corporation and lying to investigators, U.S. Attorney Christopher J. Christie announced.

A fourth executive, the Chief Operating Officer, pleaded guilty to obstruction of justice, according to Assistant U.S. Attorney Robert Kirsch. Also today, the Securities and Exchange Commission filed a civil suit in federal court in Newark against Medi-Hut and the individual defendants.

Charging documents filed by the U.S. Attorney outline a complex corporate fraud scheme, spanning from June 2001 through March 2003, designed to allow Medi-Hut to meet its forecasted financial targets and boost the value of the company's stock, which was a small cap stock traded on the Nasdaq exchange. The scheme to defraud resulted in a market loss of approximately $100 million as the fraud was revealed publicly and the stock price plummeted.

"Sadly this is another stunning case of corporate abuse in which investors were robbed," said Christie. "A positive to come from this is that aggressive prosecutions of these defendants and others is reforming the way Wall Street does business. We have our sights on others out there who will also pay dearly for the damage they've done."

Headquartered in Lakewood, N.J., Medi-Hut was formed by Joseph Sanpietro and his brother, Vincent Sanpietro, in 1982, as a national distributor of medical devices. The company expanded into the sale of brand name and generic over-the-counter drugs and prescription drugs, and went public in 1998. In July 2001, the company was a small-cap stock listed for trading on the Nasdaq market.

Joseph Sanpietro, the company's former President, Chief Executive Officer, and Director; Laurence Simon, the former Chief Financial Officer; and Lawrence Marasco, the former Vice President of Sales and Marketing, pleaded guilty before U.S. District Judge Jose L. Linares. Each admitted that, from June 2001 through March 2003, they conspired to fraudulently inflate Medi-Hut's revenue and earnings, and to conceal related-party transactions with Larval, Medi-Hut's largest customer. Larval was a New York company secretly owned and controlled by Marasco, while he was a Medi-Hut vice president. For fiscal year 2001 alone, Larval accounted for approximately 62 percent of Medi-Hut's business.

Joseph Sanpietro, Simon and Marasco also admitted to lying to the Securities and Exchange Commission. Vincent Sanpietro, the company's Chief Operating Officer and a Director, pleaded guilty to obstructing the SEC's investigation and admitted to testifying falsely to the SEC during its investigation of the company.

During their guilty pleas, Joseph Sanpietro, Simon and Marasco admitted that they and others caused the company to inflate its revenue and earnings after the close of fiscal year 2001, which ended on Oct. 31, 2001, and thereafter, to create the appearance that the company met its financial forecasts. Instead of Medi-Hut's public pronouncements purporting substantial growth and earnings, Simon, the former CFO, admitted that Medi-Hut would have posted earnings losses for fiscal year 2001, and thereafter, had the coconspirators not engaged in accounting fraud.

According to the Informations, on Jan. 11, 2002, the day after Medi-Hut publicly released the false and inflated year-end financial results for fiscal year 2001, Medi-Hut was trading at approximately $12.70 per share. On Feb. 4, 2002, after questions were raised publicly about the company's finances, the stock plummeted to $3.29 per share, which constituted a more than 50-percent loss from the previous day's trading price of $6.70 per share.

The Government also charged that each of the defendants had substantial holdings of Medi-Hut stock, and intended to sell the stock at windfall profits garnered through the scheme. Simon and Marasco admitted today that they engaged in the conspiracy to boost the value of their individual Medi-Hut holdings, Assistant U.S. Attorney Kirsch said. Joseph Sanpietro owned approximately 3.3 million shares of Medi-Hut, or approximately 22 percent of its outstanding shares. Vincent Sanpietro owned approximately 550,000 shares of Medi-Hut, or approximately four percent of its outstanding shares. Marasco owned approximately 350,000 shares of Medi-Hut, or approximately 2.4 percent of its outstanding shares, and Simon owned 30,000 shares.

Pleading guilty to Informations today were:

Joseph Sanpietro, 53, of Freehold, N.J. -- Medi-Hut's co-founder, President, Chief Executive Officer, and Director, from 1982 until he was removed in early March 2003 - to one count of conspiracy to commit securities fraud and wire fraud, and one count of making false statements to the SEC. Sanpietro faces a maximum penalty of five years in prison and a $250,000 on each count.

Vincent Sanpietro, 56, of Toms River, N.J. -- Medi-Hut's co-founder, Chief Operating Officer and Director until he was removed in early March 2003 - to one count of obstructing the SEC's investigation. Sanpietro faces a maximum of five years' incarceration and a $250,000 fine.

Laurence Simon, 37, of Englishtown, N.J., Medi-Hut's former Chief Financial Officer, from June 2001 until he was removed in early March 2003, - to one count of conspiracy to commit securities fraud and wire fraud, and one count of making false statements to the SEC. Simon was a Certified Public Accountant, but forfeited his license as part of the plea agreement with the Government. Simon faces a maximum penalty of five years in prison and a $250,000 on each count.

Lawrence Marasco, 51, of Seaford, N.Y., Medi-Hut's former V.P. of Sales and Marketing and President and sole shareholder of Larval Corporation - to one count of conspiracy to commit securities fraud and wire fraud, and one count of making false statements to the SEC. In addition, Marasco's plea agreement also includes additional forthcoming charges relating to tax evasion. Marasco faces a maximum penalty of five years in prison and a $250,000 fine on each count.

In addition, Judge Linares can impose a fine and order restitution from each defendant. Joseph Sanpietro, Laurence Simon, and Lawrence Marasco have agreed to cooperate with authorities with any ongoing investigations. Assistant U.S. Attorney Kirsch stated that Medi-Hut, to date, had been cooperative with the investigation, and that the investigation was ongoing.

Also today, the SEC filed a civil suit in federal court in Newark against Medi-Hut, Joseph Sanpietro, Laurence Simon, and Lawrence Marasco, seeking injunctive relief against the company and the individuals, and barring the individuals, for their lifetimes, from seeking officer or director positions in any publicly held company. In addition, Joseph Sanpietro has agreed to pay approximately $185,000 to the SEC, as disgorgement of unjust enrichment and prejudgment interest.

As part of the scheme, according to the Informations:

• The co-conspirators overstated the company's revenue and earnings for fiscal year 2001, ending October 31, 2001; the first quarter of fiscal year 2002, ending January 31, 2002; and the second quarter for fiscal year 2002, ending April 30, 2002.

• The co-conspirators inflated Med-Hut's year-end revenue for fiscal 2001 by approximately $1.5 million, or approximately 13 percent, and its pre-tax earnings by approximately $1.3 million. For the close of this fiscal year, among other improprieties, the co-conspirators and others created fictitious sales invoices, which were backdated, in order to inflate revenue by approximately $1 million and pre-tax earnings of approximately $900,000.

• The co-conspirators inflated Medi-Hut's revenue by approximately $3 million, or approximately 42 percent, and its pre-tax income by approximately $2.9 million for the first quarter for fiscal year 2002, which ended Jan. 31, 2002.

• The co-conspirators inflated Medi-Hut's revenue by at least $2 million, or approximately 61 percent, and its pre-tax income by approximately $1.3 million for the second quarter for fiscal year 2002, which ended April 30, 2002.

• The co-conspirators inflated Medi-Hut's revenue by approximately $468,000, or approximately 8 percent, and its pre-tax income by approximately $2 million, for the third quarter for fiscal year 2002, which ended July 31, 2002.

• Joseph Sanpietro and Simon falsely certified the company's financial statements for fiscal year 2001, the first quarter of fiscal year 2002, the second quarter of fiscal year 2002, and amended statements for fiscal year 2001, the first quarter of fiscal year 2002, and the second quarter of fiscal year 2002.

• Joseph Sanpietro and Simon approved numerous false press releases to be published to the public, which touted false information regarding the company's growth and earnings. In fact, absent the accounting fraud, Medi-Hut would have posted earnings per-share losses for fiscal year 2001, the first quarter of fiscal year 2002, and the second quarter of fiscal year 2002.

• Even though Marasco's company Larval was Medi-Hut's largest customer, accounting for over 60 percent of Medi-Hut's total revenue for fiscal year 2001 alone, the co-conspirators deliberately caused Medi-Hut to fail to disclose to the public and the SEC the related-party transactions between the company and Larval.

• In order to bolster the company's pronouncement of false financial results, as well as to conceal from the auditors, the SEC, and the public the related-party transactions between Medi-Hut and Larval, Joseph Sanpietro and Simon created a false and inflated accounts receivable statement for approval by Larval. Marasco, in turn, forged the signature of R.M., his sister in-law, who was installed as the nominal President of Larval in an effort to conceal the related-party transactions, and returned the document to his co-conspirators who submitted it to the auditors.

• Each defendant, either in testimony or in preparing documents to be submitted to the SEC pursuant to its investigation, lied to the SEC or caused another to lie to the SEC in an effort to impede its investigation.

According to documents filed by the government, the fraudulent accounting scheme began unraveling on Feb. 4, 2002, when the New York Post published an article which revealed that Medi-Hut failed to disclose related-party transactions between Larval, which was apparently owned by Marasco, and Medi-Hut, where he served as a Vice President, even though Larval accounted for over 60 percent of Medi-Hut's revenues. Shortly afterward, the SEC opened an investigation. Thereafter, each of the named executive defendants engaged in efforts to impede and obstruct the SEC's investigation.

For example:

• In response to the New York Post article, Marasco admitted today he created a document falsely stating that Medi-Hut had no knowledge of Marasco's interest in Larval, and that he no longer had any financial interest in Larval.

• Marasco admitted that on or about Feb. 12, 2002, he signed and created a false document, which he backdated to Feb. 1, 2001, designed to purportedly transfer ownership of Larval to his sister in-law, R.M. Notwithstanding this document, Marasco also admitted today that he maintained day-to-day control and beneficial ownership of Larval.

• Marasco admitted that he instructed R.M. to testify falsely to the SEC prior to her testimony, and state that she had received this bogus ownership transfer document in or around February 2001 in an effort to conceal Marasco's participation in the undisclosed related-party transactions.

• Joseph Sanpietro admitted that he testified falsely to the SEC, and stated that he too received the supposed ownership transfer document in or around February 2001, when, in fact, it had not been created yet. Sanpietro admitted he lied in order to conceal the improper relationship between Medi-Hut and Larval.

• Laurence Simon admitted that in response to a subpoena issued by the SEC, he knowingly provided a fictitious invoice in an attempt to make the fraudulent transaction appear legitimate, and thereby impede the SEC's investigation.

• Vincent Sanpietro admitted he obstructed the SEC's investigation by testifying falsely to the SEC, in an attempt to conceal Medi-Hut's improper premature recognition of two sales in the first quarter of fiscal year 2002.

U.S. Attorney Christie credited the Newark Division of the FBI, under the direction of Special Agent In Charge Louie F. Allen, and Postal Inspectors of the U.S. Postal Inspection Service, under the direction of Martin Phanco, Inspector in Charge of the North Jersey and Caribbean Division, for their persistence and skill in the investigation. Christie also credited the SEC and the SEC's Enforcement Division for their valuable assistance in developing the case against the defendants.

The Government is represented by Assistant U.S. Attorney Kirsch, of the Securities and Health Care Fraud Unit of the U.S. Attorney's Office, in Newark.

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