DETROIT – The Federal Bureau of Investigations is reviewing Kmart Corp. (KM) documents as part of an investigation into possible criminal violations at the bankrupt company.
The investigation is one more hurdle for the discount retail giant. Kmart posted a loss of $2.42 billion for the 2001 fiscal year in a filing Wednesday with the Securities and Exchange Commission, which also is looking into Kmart's accounting.
"All I can tell you is we are looking at the situation with Kmart to see if there are any criminal violations," FBI Special Agent Dawn Clenney said Thursday. "We have to have some time to review documents."
Kmart spokesman Jack Ferry said the company was notified of the FBI investigation earlier this year.
"Kmart is cooperating fully with the FBI," he said, and declined to comment further.
The SEC is under increased pressure to investigate criminal wrongdoing in bankruptcy cases in the wake of Enron Corp.'s collapse, said Jerry Reisman, a corporate fraud expert with the law firm Peirez and Reisman in New Jersey. Reisman said it's uncommon for the FBI to get involved in SEC investigations when the business is as large as Kmart.
"The change in times predicated by potential criminal activities at Enron have now placed a greater burden on the SEC, the Department of Justice and the FBI to investigate criminal wrongdoing at companies of any size," Reisman said.
But he said the reasons for investigating Kmart are likely more than just post-Enron caution.
"It has been reported that Kmart executives may have taken improper loans from the company prior to their leaving the company," Reisman said. "These individuals profited at a time when the shareholders posted great losses."
Kmart paid more than $23 million in executive retention loans between October and its Jan. 22 bankruptcy filing.
A Kmart official said the company is considering trying to recover some of those loans.
"The board may or may not decide to take action to reconsider that loan," chief financial officer Al Koch told Dow Jones Newswires on Thursday. Ferry confirmed the quote but would not elaborate.
The Troy, Mich.-based retailer began reviewing its accounting methods following an anonymous letter, also addressed to the SEC, that claimed to be from employees. The letter was received shortly before the Chapter 11 filing.
Kmart said its accounting review dealt with vendor rebates and general liability reserves. It has amended its previously reported earnings for the first three quarters of 2001 to reflect the new ways it will report vendor discounts.
Kmart said Wednesday it has since received copies of additional letters sent to the SEC and others "expressing concern" about various matters. Kmart said it's investigating those matters, as well as the way the company was managed under former chief executive Chuck Conaway.
Some analysts said that based on the information regarding vendor rebates released Wednesday, it doesn't appear that Kmart's accounting problems were that serious.
"It looks like they've come clean about everything at this point," said Mike Porter, a retail stock analyst with Morningstar. "A lot of times with these things it gets worse before it gets better, but I don't think that's the case here."
Porter said accountants for Kmart from PricewaterhouseCoopers used "aggressive" but not illegal methods.
Arun Jain, a marketing professor at the Buffalo School of Management, said Kmart's bankruptcy was still most likely the result of mismanagement.
"They failed to recognize the competition they had. Wal-Mart was attacking them on the price front and Target was beating them on quality," Jain said.
Kmart filed for bankruptcy following disappointing holiday sales and a stock dive. It has long struggled to keep up with Wal-Mart Stores Inc. and Target Corp.
Jain said the investigation could further hurt the company's chances of making a comeback.
"It doesn't sound very good, because the FBI doesn't investigate any company casually," he said. "Investor confidence could be damaged if financial improprieties are discovered at Kmart."
Kmart shares were down 6 cents Thursday to close at $1.11 on the New York Stock Exchange.