SEC charges two Kmart ex-bosses

US watchdogs have charged two ex-top executives of Kmart with fraud in the lead up to the retailer’s bankruptcy.

The Securities and Exchange Commission (SEC) has accused ex-chief executive Charles Conway and ex-finance chief John MacDonald of misleading investors.

The men made “materially false” statements about Kmart’s ability to pay its bills in the lead up the firm’s bankruptcy in 2002, the SEC alleged.

Lawyers for the two said they expected their clients to be “exonerated”.

Kmart emerged from Chapter 11 bankruptcy protection in 2003 and has since merged with Sears in a deal worth $11bn (£6bn).

SEC investigators have been looking into sales and ordering at Kmart in the months leading up to its bankruptcy filing in 2002.

In the summer of 2001, the SEC alleges that Mr Conway and Mr MacDonald did not properly explain to investors and analysts the reasons behind a “reckless and unilateral purchase of $850m of excess inventory”.

Simply put, the company stocked up too early for Christmas.

According to the SEC, the two former Kmart executives blamed seasonal inventory build up and “actions taken to improve our overall in-stock position” instead of mistakes by the company.

They also failed to admit the effect that the over-ordering would have on Kmart’s ability to pay its bills, preferring instead to slow down payments to suppliers.

By the end of the third quarter ending 31 October, 2001, the company was $570m behind in its payments to suppliers, a fact that Kmart should have made clear to investors, the SEC claims.

Mr Conway and Mr MacDonald left the company in 2002.

Kmart emerged from bankruptcy protection in May 2003 after the discount retailer closed more than 300 stores and laid off more than 35,000 employees.

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