Yesterday federal authorities charged two former Kmart executives with committing an accounting fraud that resulted in the bankrupt retailer overstating earnings by $42 million.

Separately, the Securities and Exchange Commission (SEC) filed civil and criminal complaints against Enio Montini, a former senior vice president and general manager, and Joseph Hofmeister, a former divisional vice president.

According to the SEC, Mr. Montini and Mr. Hofmeister conspired to mislead Kmart accountants about the true nature of a $42 million payment from American Greetings Corp., a Kmart vendor. The SEC alleges that the $42 million was improperly included in the financial reports for the second quarter of 2001, causing Kmart to understate losses by $0.06 per share.

Both Mr. Montini and Mr. Hofmeister were let go from Kmart in May 2002, following a reorganization of the company’s Troy, MI, headquarters. Kmart filed for bankruptcy on Jan. 22, 2002 and exits bankruptcy protection in April.

If they are convicted, Mr. Montini and Mr. Hofmeister face a maximum penalty of 10 years in prison and fines up to $1 million.

On Tuesday, Kmart said that it has enough evidence to take legal action against former Chief Executive Charles Conaway, who left the company two months after it filed for bankruptcy.