Detroit – The Securities and Exchange Commission on Tuesday filed civil charges against two former Kmart executives, accusing them of making “materially false and misleading” disclosures to shareholders before the retailer’s 2002 bankruptcy filing.
The complaint filed in U.S. District Court in Detroit charges former chairman and chief executive Charles C. Conaway and former chief financial officer John T. McDonald with securities fraud and aiding and abetting securities fraud. It also accuses them of aiding and abetting violations of rules that require publicly traded companies to file quarterly reports and to include material information in the reports.
“Investors are entitled to both accurate financial data and an accurate description of the story behind the numbers,” Peter Bres nan, an associate director in the SEC’s Enforcement Division, said in a statement.
Conaway’s lawyer, Scott Lassar, said in a statement that Conaway is disappointed by the action: “Mr. Conaway acted at all times in good faith and in the best interest of Kmart.”
McDonald’s lawyer, Jack Sylvia, said in a statement that his client “expects to be exonerated when the facts are tested in a court of law.”
The disclosures in question were part of regulatory filings Kmart made for the third quarter and nine months ended Oct. 31, 2001, and in a Nov. 27, 2001, conference call with analysts and investors, the SEC said.
Kmart filed for bankruptcy Jan. 22, 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart workers and cancellation of company stock.
According to the SEC, Kmart’s filings failed to disclose the reasons for a massive inventory buildup in 2001 and the impact it had on the company’s liquidity.
The company attributed the inventory increases to “seasonal inventory fluctuations and actions taken to improve our overall in-stock position.” The SEC says a large part of the buildup was caused by a Kmart officer’s “reckless and unilateral purchase of $850 million of excess inventory.”
