Business Week
Former Kmart Corp. Chief Executive Officer Charles Conaway must pay more than $10 million in a penalty and loan repayment for misleading shareholders before the retailer filed for bankruptcy in 2002, a judge said.
The U.S. Securities and Exchange Commission sued Conaway in 2005, accusing him of duping investors in the management discussion and analysis, or MD&A, portion of a third-quarter 2001 securities filing and during a Nov. 27, 2001, conference call. Conaway failed to tell investors that Kmart faced a cash shortage and was delaying payments to vendors in the months before it filed for bankruptcy, the SEC said.
A federal jury in June found that Conaway hid information about Kmart’s cash shortage, aiding and abetting the company’s misstatements. U.S. Magistrate Judge Steven Pepe in Ann Arbor, Michigan, upheld the finding last month and today fined Conaway $2.5 million and ordered him to return a $5 million retention loan, plus interest of almost $2.7 million.
“I find that the $5 million retention loan was not like salary earned by past services,” Pepe said in his 70-page opinion. “It was not money to which the defendant would have been entitled irrespective of his fraud.”
Harmed Investors
The SEC also asked Pepe to bar Conaway from serving as an officer in a public company. Pepe denied the request, finding that “the disgorgement and the penalty, the damage to his reputation will be enough to deter any future securities violations.”
Conaway’s action harmed investors, Pepe said.
“Had there been no securities violations by Mr. Conaway and Kmart on November 27, 2001, a substantial number of institutional and some individual investors would have sold their Kmart stock and avoided the financial loss that came to many when Kmart went bankrupt in January 2002,” he said.
Scott Lassar, Conaway’s lawyer, didn’t immediately return a call for comment.
Kmart sought bankruptcy protection on Jan. 22, 2002, subsequently shedding 599 stores and firing about 57,000 workers. Conaway was fired in March 2002.
Delayed Payments
The company exited bankruptcy in May 2003. Kmart Holding Corp. later bought Sears, Roebuck & Co., creating Sears Holdings Corp., based in Hoffman Estates, Illinois.
The U.S. Securities and Exchange Commission sued Conaway in 2005, accusing him of duping investors in the management discussion and analysis, or MD&A, portion of a third-quarter 2001 securities filing and during a Nov. 27, 2001, conference call. Conaway failed to tell investors that Kmart faced a cash shortage and was delaying payments to vendors in the months before it filed for bankruptcy, the SEC said.
A federal jury in June found that Conaway hid information about Kmart’s cash shortage, aiding and abetting the company’s misstatements. U.S. Magistrate Judge Steven Pepe in Ann Arbor, Michigan, upheld the finding last month and today fined Conaway $2.5 million and ordered him to return a $5 million retention loan, plus interest of almost $2.7 million.
“I find that the $5 million retention loan was not like salary earned by past services,” Pepe said in his 70-page opinion. “It was not money to which the defendant would have been entitled irrespective of his fraud.”
Harmed Investors
The SEC also asked Pepe to bar Conaway from serving as an officer in a public company. Pepe denied the request, finding that “the disgorgement and the penalty, the damage to his reputation will be enough to deter any future securities violations.”
Conaway’s action harmed investors, Pepe said.
“Had there been no securities violations by Mr. Conaway and Kmart on November 27, 2001, a substantial number of institutional and some individual investors would have sold their Kmart stock and avoided the financial loss that came to many when Kmart went bankrupt in January 2002,” he said.
Scott Lassar, Conaway’s lawyer, didn’t immediately return a call for comment.
Kmart sought bankruptcy protection on Jan. 22, 2002, subsequently shedding 599 stores and firing about 57,000 workers. Conaway was fired in March 2002.
Delayed Payments
The company exited bankruptcy in May 2003. Kmart Holding Corp. later bought Sears, Roebuck & Co., creating Sears Holdings Corp., based in Hoffman Estates, Illinois.
The SEC said Conaway was responsible for the company’s failure to disclose that delaying vendor payments was a primary source of working capital.
Conaway hid the company’s financial situation from the Kmart board and “was never honest with the vendors,” SEC lawyer Alan Lieberman told the jury in Ann Arbor at the beginning of the civil trial in May.
Kmart began delaying payments because of a cash crunch set off by an “extraordinary” $850 million purchase of inventory in the summer of 2001 by the company’s chief operating officer, “made without the approval or knowledge of other senior managers of the company,” the SEC said in its complaint. Kmart didn’t disclose the “inventory overbuy,” the government said.
In the third-quarter conference call, Conaway blamed slow payments on a new system that had caused invoices to be dropped, the SEC said in its complaint. “These statements were false and misleading,” the government said.
Cash Crunch
Conaway testified at a hearing in September that he didn’t withhold any important financial information.
Kmart did experience a cash crunch in late 2001 and used payment slowdowns to help deal with it, Conaway testified.
“We reversed and corrected it and it worked,” he said.
Conaway testified that Kmart faced a new liquidity crisis in January 2002 as a result of slow sales and a tight credit market. This was compounded by an analyst’s report that month saying the company was heading for a strategic bankruptcy, he said. The report set off “the proverbial run at the bank,” Conaway testified.
Pepe said that Conaway kept “the relevant facts” about the overbuy and subsequent economic crunch from Kmart’s board of directors, which “deprived them from urging Kmart’s executive to find other ways than stretching vendors to deal with the liquidity crunch and to take alternative steps to obtain secured financing when it was still possible.”
Taking action in September, October or November 2001 “may well have enabled Kmart to have weathered the harsher storms that came in December with poor sales and the Enron bankruptcy impact on credit availability,” Pepe wrote.
The case is Securities and Exchange Commission v. Conaway, 05-cv-40263, U.S. District Court, Eastern District of Michigan (Ann Arbor).
Conaway hid the company’s financial situation from the Kmart board and “was never honest with the vendors,” SEC lawyer Alan Lieberman told the jury in Ann Arbor at the beginning of the civil trial in May.
Kmart began delaying payments because of a cash crunch set off by an “extraordinary” $850 million purchase of inventory in the summer of 2001 by the company’s chief operating officer, “made without the approval or knowledge of other senior managers of the company,” the SEC said in its complaint. Kmart didn’t disclose the “inventory overbuy,” the government said.
In the third-quarter conference call, Conaway blamed slow payments on a new system that had caused invoices to be dropped, the SEC said in its complaint. “These statements were false and misleading,” the government said.
Cash Crunch
Conaway testified at a hearing in September that he didn’t withhold any important financial information.
Kmart did experience a cash crunch in late 2001 and used payment slowdowns to help deal with it, Conaway testified.
“We reversed and corrected it and it worked,” he said.
Conaway testified that Kmart faced a new liquidity crisis in January 2002 as a result of slow sales and a tight credit market. This was compounded by an analyst’s report that month saying the company was heading for a strategic bankruptcy, he said. The report set off “the proverbial run at the bank,” Conaway testified.
Pepe said that Conaway kept “the relevant facts” about the overbuy and subsequent economic crunch from Kmart’s board of directors, which “deprived them from urging Kmart’s executive to find other ways than stretching vendors to deal with the liquidity crunch and to take alternative steps to obtain secured financing when it was still possible.”
Taking action in September, October or November 2001 “may well have enabled Kmart to have weathered the harsher storms that came in December with poor sales and the Enron bankruptcy impact on credit availability,” Pepe wrote.
The case is Securities and Exchange Commission v. Conaway, 05-cv-40263, U.S. District Court, Eastern District of Michigan (Ann Arbor).
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