S.E.C. Accuses 2 Former Kmart Executives of Civil Fraud

By Louise Story
New York Times
August 23, 2005

The Securities and Exchange Commission filed a civil fraud complaint today against two of Kmart's former executives, accusing them of misleading investors about the company's financial conditions in the months before the company filed for bankruptcy in early 2002.

Charles C. Conaway, Kmart's former chief executive, and John T. McDonald, the former chief financial officer, failed to disclose a large over-purchase of inventory in the summer of 2001 in its third-quarter financial statements that year or in its earnings conference call with investors and analysts, the S.E.C. said.

Instead, the S.E.C.'s complaint said, the executives told investors that Kmart's increases in inventory were because of "seasonal inventory fluctuations." The executives also did not acknowledge that the company's late payments to vendors were harming the company's relationships with those suppliers, the S.E.C.

"We would have required full and fair disclosure, which would have been that the company may have purchased a particular amount of inventory and that that created liquidity problems and that the company did not have sufficient cash to pay all its vendors," said Peter H. Bresnan, an associate director in the S.E.C.'s division of enforcement.

Last week, an arbitration panel in Michigan said that Mr. Conaway had not committed fraud and corporate malfeasance. The Kmart Creditors Trust had sued Mr. Conaway for $1.7 billion. The arbitration panel dismissed the charges and awarded Mr. Conaway legal fees.

Lawyers for the two executives said the S.E.C.'s charges were without merit. Mr. Conaway resigned from Kmart in March 2002, and Mr. McDonald also left the company then. Kmart had no comment on the case today.

Kmart emerged from Chapter 11 bankruptcy in the spring of 2003 and it merged with Sears, Roebuck & Company earlier this year. The combined company is now called the Sears Holding Corporation.