Bankruptcy

Former Kmart CFO, CEO Must Go to Trial

A district judge rejects the duo's attempt to have the case dismissed and sends the executives to trial.
Stephen TaubOctober 4, 2006

Former Kmart chief financial office John McDonald, and former Chief Executive Officer Charles Conaway, must stand trial for their role in the once-gilded retailing giant’s collapse earlier this decade, according to the Detroit News.

U.S. District Judge Paul Gadola in Flint, Michigan, rejected the pair’s bid to dismiss a civil complaint filed by the Securities and Exchange Commission in August 2005 that charges that the executives misled investors about the retailer’s financial condition before Kmart filed for bankruptcy in 2002, the paper added. In its complaint, the SEC alleges that Conaway and McDonald “are responsible for material misrepresentations and omissions about the company’s liquidity and related matters” contained in the Management’s Discussion and Analysis section of Kmart’s filing for the quarter ended October 31, 2001, and in an earnings conference call with analysts and investors.

In addition, the SEC claims that the pair secretly over-bought inventory from suppliers and then slowed down payments to the vendors. They are also accused of lying about why vendors were not being paid on time and misrepresenting the impact that Kmart’s liquidity problems had on the company’s relationship with its vendors, many of whom stopped shipping product to retailer. “Kmart had made an extraordinary and reckless over purchase of inventory … instead of candidly admitting the fact of the ill-advised overbuy and the significant impact it had on the company’s liquidity,” noted the SEC complaint.

The Commission is seeking permanent injunctions, disgorgement with prejudgment interest, civil penalties and officer and director bars. “The SEC now looks forward to presenting its case to a jury for decision,” SEC enforcement lawyer Dean Conway said Tuesday, according to the Detroit News. The paper added that Scott Lassar, Conaway’s attorney, declined to comment on Tuesday’s decision until he discusses it with his client, and that John Sylvia, an attorney for McDonald, did not return a call seeking comment.