Two former top Kmart executives face Securities and Exchange Commission charges for misleading investors about Kmart's financial condition in the months preceding the retailer claiming bankruptcy in January 2002.
According to the SEC's allegations, former chief executive Charles C. Conaway and former chief financial officer John T. McDonald made misleading disclosures about the company's liquidity in its quarterly financial reports from October 2001, as well as making misleading statements in an earnings conference call with analysts and investors. The suit was filed in the U.S. District Court in the Eastern District of Michigan.
"Investors are entitled to both accurate financial data and an accurate description of the story behind the numbers," said associate director in the division of enforcement Peter H. Bresnan, in a statement. "Kmart's senior management failed to honestly inform investors that Kmart faced a liquidity crisis in the third quarter of 2001, how the company's own ill-advised action had caused the problem, and what steps management took to respond to it."
The SEC said that Conaway and McDonald failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company's liquidity. According to SEC investigators, a significant portion of the inventory buildup was caused by a Kmart executive's decision to purchase $850 million of excess inventory, which then resulted in the pair slowing payments owed to outside vendors.
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