Troy, MI, Oct. 18--Prosecutors say Enio (Tony) Montini Jr. and Joseph Hofmeister conspired to cook Kmart's books.
Lawyers for the former executives say they were simply following Kmart's sloppy accounting practices.
In federal court in Detroit on Friday, the stage was set for the first trial to spin out of the events leading up to Kmart's 2002 bankruptcy.
The trial beginning Oct. 28 is to decide whether the men are guilty of conspiracy, securities fraud and making false statements to the Securities and Exchange Commission about the way they allegedly told Kmart accountants and auditors to handle a $42.3 million vendor payment.
Montini and Hofmeister are the only Kmart executives to be charged so far. Although the two men aren't accused of causing the bankruptcy, prosecutors said their activities prompted Kmart to understate its second-quarter losses in 2001 by 32%, which misled investors about the scope of Kmart's worsening financial situation.
On Jan. 22, 2002, Kmart became the largest retailer in U.S. history to declare bankruptcy, the result of fierce competition, an economic downtown, questionable decisions and lavish spending by executives. The bankruptcy wiped out $6.3 billion in stockholder equity, left creditors on the hook for $7.8 billion in losses and resulted in 67,000 firings and the closing of 600 stores. Kmart emerged from the Chapter 11 bankruptcy on May 6 as a new corporate entity, Kmart Holdings Corp., with an uncertain future.
Had the men not deceived the company, prosecutors said, Kmart's lenders and board of directors would "have been in better positions to foresee the financial train wreck approaching and could have taken steps to avoid it," assistant U.S. attorneys Stephen Robinson and Craig Weier said in court papers. They declined to be interviewed.
So did defense lawyers. But they said in court documents that the charges are bogus.
"No crime was committed," said Hofmeister lawyers Mark Srere of Washington, DC, and Harold Gurewitz of Detroit. "Hofmeister and Montini did not engage in fraud.. . .This proposed prosecution is garden-variety SEC civil fare at best, a demonstrably weak case even in that context and does nothing to advance the department's new initiative to punish white-collar crime."
Montini, 51, and Hofmeister, 53, were indicted in February. Montini is former senior vice president and general merchandise manager for Kmart's drugstore division. Hofmeister was former divisional vice president of merchandising in the same division.
Prosecutors said that from November 2000 to Jan. 21, 2002, the men conspired to deceive Kmart's accounting and audit staffs about how to handle a $42.3-million payment from American Greetings for a 5-year greeting card contract.
American Greetings agreed to pay the so-called vendor allowance in exchange for the exclusive right to sell cards in Kmart stores. American Greetings was to get back a prorated portion of the payment if Kmart prematurely canceled the contract.
Because of the men's actions, the indictment said, Kmart booked the entire payment in the second quarter of 2001 instead of spreading it over the life of the contract, as required by Kmart's accounting policies.
As a result, Kmart understated its losses for the quarter by six cents per share, thereby misleading investors about the extent of Kmart's rocky financial condition, the government said.
Prosecutors said the men were motivated by a fear of losing their jobs if they failed to post good second-quarter numbers. They said the pair excluded Kmart's finance and accounting staffs from contract negotiations with American Greetings and repeatedly told Susan Pifer, the division's vice president for finance, that there was no payback provision for the $42.3 million.
