Former Kmart head ordered to pay millions

By Ed White

Associated Press Writer

DETROIT (AP) -- A judge last Thursday ordered a former Kmart CEO to pay more than $10 million for misleading investors before the retail chain filed for bankruptcy protection in 2002.

However, the judge denied an SEC request that would have prevented Charles Conaway from serving as an officer or director at another public company.

"I feel the lessons learned, the hardships to him and his family, the disgorgement and the penalty, the damage to his reputation will be enough to deter any future securities violations by Mr. Conaway," U.S. Magistrate Judge Steven Pepe said.

The 70-page decision was issued nearly nine months after Conaway was found liable in a federal civil trial.

The Securities and Exchange Commission said Conaway failed to tell investors that Kmart was delaying payments to suppliers to save cash, thereby masking the deteriorating financial health of the company.

"Acts of deceit and concealment by executive corporate officers who are paid millions of dollars for their services contributes to public cynicism about corporate America and erode the public trust not only in large corporations, but also of the effectiveness of governmental regulation to curb such abuses," Pepe wrote.

Conaway also gave "false testimony" about his actions during the trial last spring, Pepe said.

Financial penalties for Conaway include a $5 million loan he received from Kmart's board, a loan that was subsequently forgiven. Pepe tacked on $2.7 million in interest for the loan, but that figure will grow when it is calculated through December 2009.

Conaway's lawyer, Scott Lassar, said the jury's verdict and the financial penalties will be appealed.

The legal case provided a glimpse of Conaway's brief tenure at Kmart and the desperate scramble to keep the company afloat before one of the largest bankruptcy reorganizations in retail history.

The SEC's case centered on Conaway's call with Wall Street analysts in November 2001 and Kmart's quarterly filing with regulators.

Conaway said sales were poor -- and the stock took a 15 percent hit -- but he didn't talk about the vendor strategy or an ill-timed purchase of $800 million in merchandise. He testified that it never crossed his mind that he was withholding critical information.

"The negative reaction would have been significantly worse had Kmart and Mr. Conaway made truthful disclosures about the magnitude of the liquidity crisis in the third quarter of 2001 including its extensive slow-pay systems," the judge said.

Kmart emerged from Chapter 11 bankruptcy as a smaller company and is now part of Sears Holdings Corp., based in Hoffman Estates, Ill.

Published: Mon, Mar 1, 2010

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