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A Tale of Three CEOs: Romney, Bain, and a Crooked Executive's Overlooked Story

When the story of Duane Reade's Anthony Cuti is put together with the better-known story of Bain's relationship with a Medicare-defrauding lab testing company, it becomes a tale of two criminal CEOs -- and of the presidential candidate who was involved in choosing them both.
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In the annals of Mitt Romney's days at Bain Capital, one story seems to have escaped our collective memory. It involves Bain's acquisition of a New York City drug store chain during Mitt Romney's tenure there, and the hiring of a new president who would turn out to have pronounced criminal tendencies.

When the story of Duane Reade's Anthony Cuti is put together with the better-known story of Bain's relationship with a Medicare-defrauding lab testing company, it becomes a tale of two criminal CEOs -- and of the presidential candidate who was involved in choosing them both.

Damon International

Recent media scrutiny of Romney has uncovered the case of Damon International, the medical lab company which Bain purchased in 1989. In addition to being Bain's CEO while it owned Damon, Romney continued to sit on Damon's Board of Directors after Bain took the company public in 1991. The company was eventually sold to Corning in 1993, which netted Romney $473,000 in personal earnings as well as creating additional profit for Bain.

That brings us to the matter of one Joseph Isola. According to the Boston Globe's archives, the paper ran a story on Jan. 5, 1990 entitled "Isola Takes Over At Damon." Then there's this headline, from July 31, 2000: "Damon Lab Executive Pleads and Is Sentenced For Conspiracy to Defraud Medicare, Reports U.S. Attorney."

The story says that a United States attorney had announced on July 26 that "Joseph Isola, age 53, formerly of Westwood, Massachusetts, and former President of Damon, an independent clinical blood laboratory, pled nolo contendere last Friday before U.S. District Court Judge Edward F. Harrington to a one count information charging a conspiracy to defraud Medicare in connection with medically unnecessary clinical laboratory blood testing."

The scandal came to be known as LABSCAM, and it included the period of Romney's involvement with the company. As Forbes observes, "before Romney indicated that he was involved in conducting an investigation while he was on the board of directors, he said that he was completely unaware of any investigation."

Romney has at various times claimed that he didn't know about the illegalities, that he "blew the whistle" on the illegalities, and that he put a stop to the crimes without notifying the authorities: "We put in place a program to stop that immediately. That's how you blow the whistle."

Um, no. You don't "blow the whistle" on crooks in your own employ by telling them to stop committing crimes -- and letting them keep their jobs. But that's not the most important part of this story. Romney's shifting story is much more troubling, and says volumes about his character. It's astonishing that it hasn't become a major campaign scandal -- but that the artificial "you didn't build that" controversy has.

But that's not the most important part of the story either.

While Mitt Romney was running Bain Capital, and while Bain Capital owned 100 percent of Damon International, Joseph Isola was selected by the Romney team to serve as the company's CEO. Romney then oversaw Isola's management of the firm for several years -- and Isola kept his job.

And a lesser-known story shows that this has happened more than once.

Duane Reade

Bain Capital's involvement in Duane Reade Pharmacies hasn't received nearly as much attention as Damon International, which was the subject of a major communications push by the Democratic National Committee. The spotlight has yet to be trained on this story.

Duane Reade was a well-known chain of family-owned New York City pharmacies when Bain Capital purchased it in 1992. In 1996, shortly before selling the chain to another buyout firm, Bain Capital hired a former Pathmark executive named Anthony Cuti to serve as Duane Reade's CEO.

From Bloomberg News, Aug. 22, 2011, under the headline "Ex-Duane Reade Chief Cuti Gets Three-Year Prison Sentence":

Former Duane Reade Inc. Chief Executive Officer Anthony Cuti was sentenced to three years in prison for falsely inflating income and misleading investors ... U.S. District Judge Deborah Batts also ordered Cuti today to pay a $5 million fine. Batts called Cuti "a gifted, arrogant, driven, entitled individual" who "bullied people into committing fraudulent acts to make the company look better than it actually was" to increase his pay.

Batts said Cuti was also guilty of "the height of hubris" for re-writing his employee compensation plan that would allow him to double his compensation even if he was fired for cause, which later occurred.

The crimes were committed between 2000 and 2005, commencing roughly four years after the Bain sale. A subsequent Duane Reade owner apparently discovered Cuti's irregularities, and he was fired in 2005. But he was presumably the executive in charge when Duane Reade's New Jersey stores began the behavior which eventually led to a $50,000 fine from the State of New Jersey the following year -- behavior that included selling expired and/or mispriced non-prescription drugs, infant formula, baby food and other products at the company's New Jersey drug stores. (Duane Reade promptly violated that agreement, leading to $200,000 in fines and fees the year after that.)

Damon International's Medicare fraud made it an attractive target for Democratic campaigns, especially in Florida and other states with high Medicare populations. But selling expired drugs and infant formula is a pretty nasty thing to do too. And hiring an executive who commits serial investor fraud? Investor fraud's the kind of crime that brought down our economy -- and for which no Wall Street executive has been arrested.

A Tale of Three CEOs

There's no evidence that Romney was directly involved in the ongoing criminality which took place for years at Damon International -- even though some of it took place on his watch. And there's certainly no evidence he knew of the crime spree that Anthony Cuti would eventually undertake when Cuti was hired as Duane Reade's CEO.

It certainly raises questions about Romney's judgement, however. Isola was promoted from within, while Cuti was presumably selected after a thorough search. In both cases, Mitt Romney had responsibility for ensuring that the right person was selected for the job. It's reasonable to ask whether this casts a negative light on a would-be president's ability to judge human character and make good hiring decisions.

But, valid as those questions are, this story is bigger than Joseph Isola and Anthony Cuti. It's bigger than Bain Capital or even Romney's candidacy. In Part #2, we'll discuss the most important aspect of this tale of three CEOs: Mitt Romney, Joseph Isola, and Anthony Cuti.

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