SEC Charges Former Kmart Duo

Washington — Former Kmart CEO Charles Conaway and former Chief Financial Officer John McDonald were recently charged with securities violations for allegedly lying to investors about the giant retailer's financial condition in the months leading up to its 2002 bankruptcy.

The Securities and Exchange Commission charged the pair with misrepresenting the company's liquidity in its 10-Q report for the third quarter and nine months ended Oct. 31, 2001 and in a conference call with analysts and investors.

Additionally, the commission charged that in their management discussion and analysis, Conaway and McDonald failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company's liquidity. While the report attributed the actions to seasonal inventory fluctuations and efforts to improve in-stock positions, the SEC charged a significant portion of the buildup was caused by the officers' “reckless and unilateral purchase of $850 million in excess inventory.”

The complaint, filed in the U.S. District Court for the Eastern District of Michigan, stated that they then dealt with the liquidity problems by lying about why vendors were not being paid on time and misrepresented the impact of the liquidity crisis on the company's relationships with vendors, many of whom continued shipping Kmart into the fall before cutting off deliveries. Kmart filed for bankruptcy on Jan. 22, 2002.

“Kmart's senior management failed to honestly inform investors that Kmart faced a liquidity crisis in the third quarter of 2001, how the company's own ill-advised action had caused the problems and what steps management took to respond to it,” said Peter Bresnan, an associate director in the SEC's division of enforcement.

Among other remedies, the action seeks civil penalties and a bar on the executives serving as officers or directors in any public company.