Kmarts ex-CEO, Charles Conaway, has been ordered by the SEC to pay over $10 million for misleading investors about the companys financial position in the months leading up to its 2002 bankruptcy.
The SEC originally charged Conaway back in August 2005, and on June 1 of last year, a jury in Ann Arbor, Mich., returned a verdict in the SECs favor on all charges. Now the court has ordered Conaway to pay disgorgement of $5 million, prejudgment interest of over $2.85 million and a civil penalty of $2.5 million. Conaway could also be subject to a further civil penalty of $5 million if he doesnt provide the court with a declaration saying that he has not received and will not seek any payment, reimbursement or indemnification from any third party for any portion of the civil penalty.
Conaway has also been forbidden to take any action to transfer, conceal or dissipate his assets for 60 days while his lawyers try to negotiate the terms of a stay pending his appeal.
The SEC had accused Conaway and former CFO John T. McDonald of failing to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company's liquidity. The MD&A disclosure of the 10-Q they filed for the third quarter of 2001 attributed increases in inventory to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The SEC said the disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officers unilateral purchase of $850 million of excess inventory.
According to the SECs complaint, the defendants dealt with Kmart's liquidity problems by slowing down payments that the retailer owed to vendors, thereby effectively borrowing $570 million from them by the end of the third quarter. According to the complaint, Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmart's liquidity problems had on the company's relationship with its vendors, many of whom stopped shipping merchandise to Kmart during the fall of 2001. Kmart filed for bankruptcy on Jan. 22, 2002.
Kmart merged with Sears in 2004 in an $11 billion deal and is now a wholly owned subsidiary of Sears Holding Corp. Conaway could use some of that money now to pay off his SEC penalty.