VideoIt's getting ugly at Kmart.
Yesterday two former midlevel executives at the bankrupt retailer were indicted for engaging in a $42.3 million fraud to enable the company to meet financial targets.
At the same time, the company's current management was filing documents in court stating there's enough evidence to support a lawsuit against the retailer's previous CEO, Charles Conaway.
Enio A. "Tony" Montini Jr. and Joseph Hofmeister were charged with securities fraud, making false statements to the Securities and Exchange Commission, and conspiracy to commit those offenses, according to published reports.
In addition, the SEC accused Montini and Hofmeister of accounting fraud.
The charges came one day after the SEC filed civil fraud charges against eight current and former officers and employees of Qwest Communications International Inc.
Montini is a former Kmart senior vice president and general merchandise manager, while Hofmeister worked as a divisional vice president of merchandising for the company.
According to the indictment, Montini and Hofmeister negotiated a multiyear contract with one of Kmart's vendors—American Greetings Corp.—for $42.3 million.
Montini and Hofmeister lied to Kmart accounting personnel and concealed a side letter that called for the repayment of the money under certain circumstances, according to accounts of the indictment.
As a result of the scheme, Kmart improperly recognized the entire amount in the quarter ended August 1, 2001, instead of over a period of time, according to the SEC's complaint. "Those deceptions caused Kmart to understate losses by $0.06 per share," the commission added.
The SEC is seeking the return of illegally received gains, including a $750,000 forgivable cash loan Montini allegedly received from the company. The commission also wants to permanently bar the two individuals from serving as officers and directors.
If convicted, Montini and Hofmeister each face a maximum sentence of 10 years in prison and a $1 million fine on the securities fraud charge, and 5 years in prison and a $250,000 fine for the conspiracy and false statements charges, according to published accounts.
"This indictment arises from an ongoing investigation of improprieties allegedly committed by Kmart's management," U.S. Attorney Jeffrey Collins said in a statement.
On Wednesday Montini resigned from Rite Aid Corp. as senior vice president of category management, a position he had held since October.
Meanwhile, on Tuesday Kmart's board said it found "credible and persuasive" evidence to support a lawsuit against its former chief executive, Charles Conaway.
The basis of such a suit? The board says Conaway failed to disclose liquidity problems at the retailer, according to published accounts of documents made available during the company's bankruptcy-court proceedings.
"Conaway failed to perform his duties as chief executive officer to adequately supervise and direct other company executives who reported directly or indirectly to him," the documents reportedly stated.
Kmart's board said Conaway failed to disclose the "nature and extent" of the chain's liquidity problems in the last half of fiscal 2001 and that he took part in a program to systematically and improperly suspend vendor payments, according to published accounts.
The board also reportedly claims that Conaway permitted company executives to receive millions of dollars in retention loans and other payments that they would not have received had all material information been disclosed.
But Conaway's lawyer, Scott Lassar, issued a statement saying that Kmart appears to be blaming Conaway for problems that preceded his tenure at the retailer. The statement indicated that Kmart's board was kept regularly apprised of the company's initiatives and condition.
"Contrary to some public accounts, Mr. Conaway did not engage in self dealing," said Lassar.
According to Lassar, Kmart's board compensation committee approved an $11 million cash payment for Conaway one week prior to the filing of bankruptcy, which Lassar says Conaway turned down.
"Conaway wishes the best for Kmart and its employees, but he will not be the scapegoat for problems not his doing," the statement noted.
Troubles Aplenty at Ahold
On the other side of the Atlantic Ocean, Royal Ahold, the world's third-largest supermarket group, said on Wednesday the U.S. Attorney General's office was investigating the company after the grocer announced Monday it overstated about $500 million in earnings.
Ahold said it is fully cooperating with the SEC and the U.S. Attorney General.
Meanwhile, a Dutch association of accountants is informally investigating whether Deloitte Touche Tohmatsu International was negligent in its handling of Ahold's financials, according to Dow Jones.
The group, Koninklijk Nederlands Instituut van Registeraccountants (NIVRA), is an industry umbrella association that can refer member accountancies suspected of negligence to a disciplinary court. That court apparently has powers to suspend an accountant from practicing.
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