SEC Charges Kmart's Former CEO and CFO with Financial Fraud
Former Kmart CEO Charles C. Conaway and CFO John T. McDonald were charged by the SEC with securities fraud for concealing a $850 million reckless inventory overbuy and $570 million in withheld vendor payments, misleading investors about Kmart’s liquidity crisis before its January 2002 bankruptcy.
The SEC charged former Kmart CEO Charles C. Conaway and CFO John T. McDonald with violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act for materially misleading disclosures in Kmart’s Q3 2001 Form 10-Q and earnings calls. They falsely attributed a $850 million inventory buildup to seasonal adjustments, when it resulted from a unilateral, reckless purchase, and concealed that Kmart withheld $570 million in payments to vendors to manage liquidity, falsely claiming vendor relationships remained intact. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties, and officer/director bars, while acknowledging cooperation from the U.S. Attorney’s Office and FBI.
The SEC charged former Kmart CEO Charles C. Conaway and CFO John T. McDonald with securities fraud for deceiving investors about the company’s deteriorating financial condition in the months leading to its January 2002 bankruptcy. In Kmart’s Q3 2001 Form 10-Q and earnings calls, they falsely claimed inventory increases were due to routine seasonal adjustments, when in fact a Kmart officer had unilaterally purchased $850 million in excess inventory, severely straining liquidity. To mask the cash crunch, Conaway and McDonald orchestrated the withholding of $570 million in payments to vendors by the end of the quarter, while misleading investors about the cause of payment delays and downplaying the resulting supply chain disruptions. Vendors, misled by these false statements, continued shipping product until the fall of 2001, when many abruptly stopped, accelerating Kmart’s collapse. The SEC alleges these actions violated Section 10(b) and Rule 10b-5, as well as aided and abetted Kmart’s violations of Sections 10(b), 13(a), and related rules. The Commission is seeking permanent injunctions, disgorgement with prejudgment interest, civil penalties, and bars from serving as officers or directors. The investigation was conducted with assistance from the U.S. Attorney’s Office for the Eastern District of Michigan and the Federal Bureau of Investigation.
Extracted insights
- $850.00M $850 million $100M–$1B
- $570.00M $570 million $100M–$1B
- agency associate director in division of enforcement at sec
- person Charles C. Conaway
- agency director of division of enforcement at sec
- person john t. mcdonald
- person kmart officer
- person linda chatman thomsen
- person peter h. bresnan
- agency Securities and Exchange Commission
- SEC filed charges against Charles C. Conaway and John T. McDonald for financial fraud
- Charles C. Conaway is former Chief Executive Officer of Kmart
- John T. McDonald is former Chief Financial Officer of Kmart
- Charles C. Conaway and John T. McDonald made materially false disclosures about Kmart's liquidity in Form 10-Q for Q3 2001
- Kmart officer purchased $850 million of excess inventory
- Conaway and McDonald withheld $570 million from vendors by end of Q3 2001
- Kmart filed for bankruptcy on January 22, 2002
- Conaway and McDonald violated Section 10(b) of Securities Exchange Act of 1934 and Rule 10b-5
- SEC seeks relief including permanent injunctions, disgorgement, civil penalties, and officer/director bars
- Linda Chatman Thomsen is Director of Division of Enforcement at SEC
- Peter H. Bresnan is Associate Director in Division of Enforcement at SEC
SEC CHARGES KMART'S FORMER CEO AND CFO WITH FINANCIAL FRAUD FOR IMMEDIATE RELEASE 2005-119 Washington, D.C., Aug. 23, 2005 - The Securities and Exchange Commission today filed charges against two former top Kmart executives for misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy. According to the Commission's complaint, former Chief Executive Officer Charles C. Conaway and former Chief Financial Officer John T. McDonald are responsible for materially false and misleading disclosure about the company's liquidity and related matters in the Management's Discussion and Analysis (MD&A) section of Kmart's Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors. Linda Chatman Thomsen, Director of the Division of Enforcement, said, "The SEC has repeatedly emphasized the important role MD&A disclosure is intended to play in giving shareholders the ability to examine a corporation 'through the eyes of management.' Kmart senior management deprived its shareholders of that opportunity." Peter H. Bresnan, an Associate Director in the Division of Enforcement, stated, "Investors are entitled to both accurate financial data and an accurate description of the story behind the numbers. 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 Commission alleges that, in the MD&A section, 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. For example, the MD&A disclosure attributed increases in inventory to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The Commission alleges that this disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officer's reckless and unilateral purchase of $850 million of excess inventory. According to the complaint, the defendants dealt with Kmart's liquidity problems by slowing down payments owed vendors, thereby withholding $570 million from them by the end of the third quarter. According to the complaint, Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmart's liquidity problems had on the company's relationship with its vendors, many of whom stopped shipping product to Kmart during the fall of 2001. Kmart filed for bankruptcy on Jan. 22, 2002. The Commission's complaint, which was filed in the United States District Court for the Eastern District of Michigan, charges Conaway and McDonald with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-13, and 12b-20 thereunder by Kmart, and seeks as relief permanent injunctions, disgorgement with prejudgment interest, civil penalties and officer and director bars. The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of Michigan and the Federal Bureau of Investigation. See also: Litigation Release Contacts: Peter H. Bresnan Associate Director 202-551-4597 Cheryl J. Scarboro Assistant Director 202-551-4597 Alan M. Lieberman Assistant Chief Litigation Counsel 202-551-4474 http://www.sec.gov/news/press/2005-119.htm Home | Previous Page Modified: 08/23/2005
SEC CHARGES KMART'S FORMER CEO AND CFO WITH FINANCIAL FRAUD FOR IMMEDIATE RELEASE 2005-119 Washington, D.C., Aug. 23, 2005 - The Securities and Exchange Commission today filed charges against two former top Kmart executives for misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy. According to the Commission's complaint, former Chief Executive Officer Charles C. Conaway and former Chief Financial Officer John T. McDonald are responsible for materially false and misleading disclosure about the company's liquidity and related matters in the Management's Discussion and Analysis (MD&A) section of Kmart's Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors. Linda Chatman Thomsen, Director of the Division of Enforcement, said, "The SEC has repeatedly emphasized the important role MD&A disclosure is intended to play in giving shareholders the ability to examine a corporation 'through the eyes of management.' Kmart senior management deprived its shareholders of that opportunity." Peter H. Bresnan, an Associate Director in the Division of Enforcement, stated, "Investors are entitled to both accurate financial data and an accurate description of the story behind the numbers. 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 Commission alleges that, in the MD&A section, 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. For example, the MD&A disclosure attributed increases in inventory to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The Commission alleges that this disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officer's reckless and unilateral purchase of $850 million of excess inventory. According to the complaint, the defendants dealt with Kmart's liquidity problems by slowing down payments owed vendors, thereby withholding $570 million from them by the end of the third quarter. According to the complaint, Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmart's liquidity problems had on the company's relationship with its vendors, many of whom stopped shipping product to Kmart during the fall of 2001. Kmart filed for bankruptcy on Jan. 22, 2002. The Commission's complaint, which was filed in the United States District Court for the Eastern District of Michigan, charges Conaway and McDonald with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-13, and 12b-20 thereunder by Kmart, and seeks as relief permanent injunctions, disgorgement with prejudgment interest, civil penalties and officer and director bars. The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of Michigan and the Federal Bureau of Investigation. See also: Litigation Release Contacts: Peter H. Bresnan Associate Director 202-551-4597 Cheryl J. Scarboro Assistant Director 202-551-4597 Alan M. Lieberman Assistant Chief Litigation Counsel 202-551-4474 http://www.sec.gov/news/press/2005-119.htm Home | Previous Page Modified: 08/23/2005