Ex-Kmart Executives Charged

Charles Conaway, who as ceo of Kmart Corp. (Troy, Mich.) presided over the company’s plunge into bankruptcy in 2002, was the target of a Securities & Exchange Commission civil fraud complaint filed yesterday. Also charged by the SEC was former cfo John McDonald. The two were accused of misleading investors about the company’s financial conditions in the months before the bankruptcy filing.

The complaint said that Conaway and McDonald failed to explain in Kmart’s third-quarter earnings statement why the retailer bought far more inventory than usual in the summer of 2001. Instead, charged the SEC, the executives told investors that the increases were simply “seasonal inventory fluctuations.” The commission said that while the executives acknowledged that Kmart paid vendors late, they did not disclose that the late payments had harmed its relationships with suppliers.

Kmart “should have provided full and fair disclosure, which would have been that the company had purchased an excess amount of inventory and that the purchase created liquidity problems and that the company did not have sufficient cash to pay all its vendors,” said Peter Bresnan, an associate director in the SEC’s enforcement division.

Throughout the fall of 2001, Kmart was late in paying vendors, and by the end of October, it owed $300 million to creditors, the SEC said. When Kmart reported its third-quarter results a few weeks later, its numbers were accurate, Bresnan said, but the explanation was wrong.

In the summer of 2002, the SEC said, Kmart’s chief operating officer authorized the purchase of about $850 million in inventory without the permission of other Kmart managers. The purchase was much larger and earlier than usual, the complaint said.

Conaway and McDonald left Kmart in March 2002.Lawyers for the two executives said their clients would be cleared.