SEC Files Charges Against 3 Ex-Kmart Execs in Fraud Probe

Federal regulators on Thursday filed civil fraud charges against three former Kmart Corp. (KMRT) executives and five current and former managers of big vendor companies, saying they engineered a $24 million accounting fraud by the retailing giant.

The Securities and Exchange Commission (search), which has been investigating Kmart's decline into bankruptcy, said the retailer inflated earnings by improperly booking millions of dollars of payments from the vendors — Eastman Kodak Co. (EK), Coca Cola Enterprises Inc. (KO), and PepsiCo Inc. (PEP) and its Frito-Lay division.

Five of the former Kmart and vendor company executives settled the SEC's charges by agreeing to pay civil fines totaling $160,000 and agreeing to refrain from future violations of securities laws. In one case, a former Kmart vice president was prohibited for five years from serving as an officer or director of a public company. They neither admitted nor denied wrongdoing.

The cases are pending against the other three executives.

Neither the retailer nor the vendor companies have been charged by civil or criminal authorities.

Federal prosecutors last year dropped their fraud case against two other former Kmart executives in the middle of their trial on charges they conspired to inflate the retailing giant's earnings.

In a civil lawsuit filed in federal court in Detroit, the SEC accused the eight Kmart and vendor executives of causing Kmart to issue false financial statements by improperly accounting for millions of dollars worth of vendor "allowances" prior to the company's bankruptcy in January 2002. The vendors paid Kmart the fees for promotional and marketing activities, according to the SEC.

The deceptive scheme caused Kmart to overstate by $24 million, or 10 percent, its earnings for the fourth quarter and fiscal year ending Jan. 31, 2001, the SEC alleged.