Washington, DC, December 3--Three former Kmart executives and representatives of several major vendors were charged on Thursday with fraudulently accounting for $24 million of profit before the retailer filed for bankruptcy in 2002.
In a civil complaint filed in federal court in Detroit, the U.S. Securities and Exchange Commission said the defendants improperly accounted for millions of dollars of vendor "allowances" that the retailer, now known as Kmart Holdings Corp. obtained for promotional and marketing activities.
The vendors include soft drink bottler Coca-Cola Enterprises Inc., film maker Eastman Kodak Co. and two units of soft drink and snack food company PepsiCo Inc.
The SEC, whose investigation is continuing, said the defendants caused Kmart to recognize allowances prematurely by providing false information to the company's accountants and its independent auditor, PricewaterhouseCoopers LLP.
This, it said, led Kmart to issue false financial statements, and overstate fourth-quarter and fiscal 2001 profit by $24 million, or 10 percent, the SEC said.
Kmart corrected the errors after filing for Chapter 11 bankruptcy protection from creditors in January 2002. It emerged from bankruptcy in May 2003, and last month agreed to buy Sears, Roebuck & Co.
Among the people charged in the SEC lawsuit are three former Kmart divisional vice presidents -- Albert Abbood, Michael Frank and John Orr.
Also named were David Kirkpatrick, a former Coke Enterprises national sales director; Darrell Edquist, a former Kodak vice president; David Bixler, a PepsiCo vice president who was a national sales director of the company's Pepsi-Cola division; Randall Stone, a former national account manager for PepsiCo's Frito-Lay unit, and Thomas Taylor, a former Frito-Lay sales director.
Abbood, Frank, Edquist, Stone and Taylor settled with the SEC without admitting or denying any wrongdoing.
Orr's lawyer, Russell Weigel, said he had not yet seen the SEC complaint.
"Based on the information revealed to us so far, we anticipate a vigorous defense," Weigel said.
Sean Walsh, the attorney for Kirkpatrick, said, "We're very disappointed they went ahead with this action."
He added that his client did nothing wrong.
"We are not going to roll over," Walsh said. "We are going to very vigorously try to demonstrate that what Kmart may or may have not done, it did on its own and did not get any help from David Kirkpatrick."
Abbood and Stone, who represented themselves, and lawyers representing the other defendants could not immediately be reached for comment.
Frank was barred from serving as an officer or director of a publicly traded company for five years. Four others agreed to civil monetary penalties: Abbood will pay $50,000, Edquist $55,000, Stone $30,000 and Taylor $25,000.
