The Securities and Exchange Commission (search) Tuesday charged two former top Kmart executives with misleading investors about the company's financial condition in the months preceding its bankruptcy.

The SEC accused former Chief Executive Charles Conaway (search) and former Chief Financial Officer John McDonald of making materially false and misleading disclosures about the company's liquidity and related matters in its quarterly report for the third quarter ended Oct. 31, 2001.

The SEC has been investigating vendor accounting practices at Kmart prior to the retailer's filing for bankruptcy in January 2002.

Kmart, which emerged from bankruptcy in 2003, has since acquired Sears, Roebuck and Co., and the combined company is called Sears Holding Corp. (SHLD).

Attorneys for the two former officers could not immediately be reached for comment.

The SEC said Conaway and McDonald did not adequately disclose the reasons for a massive inventory buildup in the summer of 2001 in the "Management's Discussion and Analysis" section of Kmart's quarterly report.

A significant portion of the inventory came from an "officer's reckless and unilateral purchase of $850 million of excess inventory," the SEC said, but the quarterly report attributed the buildup to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position."

The SEC said Conaway and McDonald slowed down payments to vendors, withholding $570 million by the end of the third quarter of 2001, then lied about why the vendors were not being paid on time.

The SEC is seeking permanent injunctions, disgorgement with prejudgment interest, civil penalties, and officer and director bars against Conaway and McDonald.