Troy, MI, Nov. 4--A federal prosecutor on Monday described two former Kmart executives as engaging in a conspiracy of lies and deceit to inflate the discount retailer's earnings, while defense lawyers said no crimes were committed by the men.
Jurors in U.S. District Court heard opening statements in the trial of Enio A. "Tony" Montini Jr. and Joseph Hofmeister, who are accused of securities fraud, making false statements to the U.S. Securities and Exchange Commission and conspiracy.
"The case is really pretty simple," said Billy Jacobson, a senior Justice Department trial attorney. "The defendants deceived their colleagues, deceived their company, deceived the public in order to make themselves look better."
The government says Montini, 51, and Hofmeister, 53, helped Kmart meet Wall Street's earnings expectations during the second quarter of 2001--boosting its earnings by six cents a share--by leading the company to improperly record a $42.3 million payment from vendor American Greetings Inc.
But lawyers for the men say they were following Kmart's accounting procedures and the technical accounting issues were out of their hands. They also say that a quarterly report filed with the SEC that is at issue in the case was not false.
"Pay close attention to the holes in the government's case," said Mark Srere, one of the lawyers representing Hofmeister. "There was nothing hidden, there was nothing false."
Testimony was to begin Tuesday in the trial, which is expected to last four to six weeks.
Kmart Corp. closed nearly 600 stores and shed 57,000 employees after filing for bankruptcy protection in January 2002. It emerged from bankruptcy in May. Kmart Holding Corp. Company officials say it will return to profitability next year.
In 2000, the government says Montini and Hofmeister negotiated with American Greeting and Hallmark Cards Inc. to make one of the companies Kmart's sole supplier of greeting cards. A five-year deal making American Greetings the supplier brought Kmart the $42.3 million payment during the second quarter of 2001.
According to the government, the men's statements to Kmart's accounting and auditing divisions about the payment resulted in Kmart's filing the fraudulent quarterly report with the SEC. In May 2002, Kmart restated its earnings in part because of the payment, which prosecutors say should have been spread over five years.
Jonathan Graham, a lawyer for Montini, told jurors that the men didn't have a motive to sway Kmart's decision to record the payment in one quarter--they didn't profit from it and didn't stand to be promoted. And he said claims that they tried to cover up the nature of the payment don't make sense.
"It's not something you can hide at a large company," Graham said. "There are accountants and lawyers running all over the place."
The case contains the first criminal charges from the federal probe into Kmart's finances. But the company's eventual decline was only given veiled mention because of a ruling last month by U.S. District Judge Paul Borman, who granted a defense motion to exclude references to the bankruptcy.
Other than Srere's reference to eventual store closings and Graham's mention that Kmart's business was "in the tank" at the time of the payment, the retailer's highly publicized bankruptcy got no billing.
Montini, of Rochester Hills, is a former senior vice president and general merchandise manager of Kmart's drug store division, and Hofmeister, of Lake Orion, is a former divisional vice president of merchandising.
At the time of their indictment in February, experts in securities regulation said the charges could be a stepping stone in a government effort to pursue executives who held higher positions. But no other indictments have materialized yet from the investigation.
If convicted, Montini and Hofmeister each face a maximum sentence of ten years in prison and a $1 million fine on the securities fraud charge. The conspiracy and false statements charges carry maximum penalties of five years in prison and a $250,000 fine.
