Former Executives Settle SEC Civil Charges in Kmart Fraud

Five former executives from Kmart and its vendor companies settled Securities and Exchange Commission civil charges this week stemming from a $24 million accounting fraud they oversaw at the retail giant, the Associated Press reported.

The SEC had been looking into Kmart's spiral into bankruptcy protection in January 2002 and discovered that Kmart had boosted earnings by improperly booking millions in vendor payments from Eastman Kodak Co., Coca Cola Enterprises Inc., and PepsiCo Inc. and its Frito-Lay division.

The SEC's civil suit, filed in federal court in Detroit, accused eight executives from Kmart and the vendors of causing Kmart to issue false financial statements by failing to properly book millions of dollars in vendor “allowances” before the bankruptcy.

The scheme resulted in Kmart overstating earnings by $24 million or 10 percent of its fourth-quarter earnings for the fiscal year ending Jan. 31, 2001, the SEC alleged and the AP reported. Since emerging from bankruptcy, Kmart is now known as Kmart Holding Corp. The company recently announced plans to merge with Sears.

Settlements with the five former executives required payment of civil fines totaling $160,000 and pledges to refrain from future securities law violations. One former Kmart official was barred from serving as an officer or director of a public company for five years. The executives did not admit or deny wrongdoing. Cases are ongoing against three other executives, the AP reported.

None of the companies involved in the fraud have been charged civilly or criminally, the AP reported.


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