Troy, MI, Feb. 26--Kmart Corp. said it’s found evidence supporting possible legal action against former chief executive Charles Conaway for allegedly hiding the retailer's deteriorating finances from the board in the months before the company filed for bankruptcy.
The conclusion was part of hundreds of pages of documents related to its internal probe and reorganization plan that were released at federal bankruptcy court in Chicago.
“Conaway failed ... to adequately supervise and direct other company executives who reported directly or indirectly to him,” the company said in a summary of its investigation into the events leading up to its bankruptcy filing in January 2002.
Conaway denied the claims. A statement issued by his lawyer said Conaway “poured his heart and soul into trying to turn around the giant retailer. At all times he acted honorably and in the best interests of Kmart's employees and shareholders.”
The retailer deposed Conaway last month. Then Kmart's law firm and Conaway's counsel made presentations February 11 to Kmart's board, which concluded that there is “credible and persuasive evidence” to support legal action, according to the summary.
Kmart, which plans to exit Chapter 11 protection by April 30, said last month that it had conducted more than 570 interviews of current and former employees and reviewed more than 1.5 million pages, including accounting records, audits, and e-mails, as part of its internal investigation.
According to documents, the board believes Conaway participated in the implementation of a program to suspend vendor payments as Kmart scrambled to avert a liquidity crisis in the fall of 2001 and failed to keep Kmart's directors apprised of the company's financial situation in the last half of fiscal 2001, which ended in January 2002--the same month Kmart filed for bankruptcy.
The documents also claim that Conaway permitted executives to receive nearly $24 million in retention loans and other payments that they would not have received had more information been disclosed. Conaway received a $5 million retention loan.
Walter Connolly Jr., an attorney with Foley & Lardner who reviewed the findings of the probe, said he advised Kmart's board to support seeking the return of the $5 million loan and about $4 million in severance from Conaway.
“It (the loan) was approved by the board without independent knowledge of the liquidity crisis at Kmart, what had been done to slow down payments to vendors and the like,” Connolly said.
A statement on behalf of Conaway released by his lawyer's office said the company appears to be blaming Conaway for problems at Kmart that preceded his tenure. It said that the board was kept regularly apprised of the company's initiatives and condition.
“Conaway wishes the best for Kmart and its employees, but he will not be the scapegoat for problems not his doing,” the statement said.
Conaway, who blames the economic downturn and fierce competition in the retail industry for Kmart's difficulties, joined the company in May 2000. He left last March amid sweeping management changes.
Kmart is under investigation by the U.S. Securities and Exchange Commission and the FBI, and the company is looking into the way it was managed under Conaway.
Last month, the bankruptcy court approved Kmart's plans to close 316 stores, a move affecting at least 30,000 employees, and borrow $2 billion to help it continue operations post bankruptcy. Last year, it closed 283 stores, affecting more than 22,000 workers.
