Risk & Compliance

Kmart Vendors Hit with Fraud Charges

The SEC filed civil charges against current and former employees of Eastman Kodak, Coca-Cola Enterprises, and two subsidiaries of PepsiCo, as well ...
Stephen TaubDecember 6, 2004

The Securities and Exchange Commission has sent a loud message that it will not tolerate individuals who help others commit fraud, even if the ones committing the fraud work for another company.

As part of its probe of an accounting scandal at Kmart in early 2001, the SEC filed civil fraud charges against five current and former employees of Eastman Kodak Co., Coca Cola Enterprises Inc., and two subsidiaries of PepsiCo Inc., and three former Kmart executives.

The complaint, which was filed in the United States District Court for the Eastern District of Michigan, alleges that all eight individuals caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor “allowances.”

Kmart obtained the allowances from its vendors for promotional and marketing activities, the SEC explained. The individuals are accused of helping Kmart recognize the allowances prematurely on the basis of false information provided to the company’s accounting department.

The SEC asserts that a number of vendor representatives co-signed false and misleading accounting documents, executed side agreements, and, in some instances, provided false or misleading third-party confirmations to Kmart’s independent auditor, PricewaterhouseCoopers LLP.

As a result of these actions, Kmart overstated net income for the fourth quarter and fiscal year ended January 31, 2001 by about $24 million, which worked out to 10 percent of the total originally reported at the time.

Kmart later restated its results after filing for bankruptcy. The three former Kmart executives are John Paul Orr, former divisional vice president of Kmart’s photo division; Michael K. Frank, former divisional vice president and general merchandise manager of Kmart’s food and consumables division; and Albert M. Abbood, former divisional vice president of non-perishable products in Kmart’s food and consumables division.

Without admitting or denying the allegations, Frank consented to be barred from serving as an officer and director for five years, and Abbood agreed to pay a $50,000 civil penalty. The proposed final judgment against Frank does not impose a civil penalty because he was unable to pay, according to the SEC.

The SEC did not mention any fine for Orr. His attorney, Russell C. Weigel told The Wall Street Journal that there was “no factual basis” for the allegation and that his client plans to mount a defense. Weigel told Reuters: “Based on the information revealed to us so far, we anticipate a vigorous defense.”

The vendor executives named in the complaint are Darrell Edquist, a former vice president and general manager of Kodak; David C. Kirkpatrick, a former national sales director for Coca-Cola Enterprises; David N. Bixler, a former national sales director of PepsiCo’s Pepsi-Cola division and current vice president and general manager of PepsiCo; Randall M. Stone, a former national account manager for PepsiCo’s Frito-Lay division; and Thomas L. Taylor, a former director of sales for PepsiCo’s Frito-Lay division.

Without admitting or denying guilt, Edquist agreed to pay a $55,000 civil penalty, Stone a $30,000 civil penalty, and Taylor a $25,000 civil penalty.

SEC officials said that its Kmart investigation is continuing. A Kodak spokesman told the Journal that the company has cooperated with the SEC and believes Edquist’s agreement ends its involvement.

According to a Pepsi spokesman, the soft-drink maker also cooperated, the Journal reported. Stone and Taylor have left the company, but Bixler remains a Pepsi employee.

The report noted that a spokeswoman for Coca-Cola Enterprises said the company cooperated fully with the SEC, and that Kirkpatrick was fired in January 2004. An attorney for Kirkpatrick, Sean Walsh, told the paper his client did nothing wrong and plans to fight the charge. The case “takes a couple of documents out of the context of a larger deal,” Walsh reportedly added.

“We are not going to roll over,” Walsh told Reuters. “We are going to very vigorously try to demonstrate that what Kmart may or may have not done, it did on its own and did not get any help from David Kirkpatrick.”

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