Ex-Kmart CEO tells court he made mistakes running the retailer before its 2002 bankruptcy

Ex-Kmart CEO says he made mistakes leading company

ANN ARBOR, Mich. — A former Kmart Corp. CEO said Wednesday that he made mistakes while leading the discount retailer that he wouldn’t make again but didn’t profit from its collapse into bankruptcy.

Charles Conaway testified in federal court as part of an effort to avoid millions of dollars in penalties for misleading investors about Kmart’s financial health in 2001. He said he tried to act in Kmart’s best interests before its January 2002 bankruptcy filing.

“I’ve made plenty of mistakes and there are a number of things I would do differently,” Conaway said. He said he spent too much time in stores trying to drive improvements for customers and didn’t work closely enough with Kmart’s chief legal counsel.

The Securities and Exchange Commission accused Conaway of failing to disclose Kmart was delaying payments to suppliers to save cash, months before the bankruptcy filing. In June, a federal jury in Ann Arbor found him liable in a civil trial.

Earlier in the day, SEC lawyer Alan Lieberman told the court Conaway would have been fired “for cause” and not been entitled to a $5 million retention loan if the truth about Kmart’s finances has been known at the time. He said Conaway got $24 million in compensation for leading Kmart.

The civil trial’s penalty hearing before U.S. Magistrate Judge Steven Pepe resumes Thursday. Conaway last month asked the judge to throw out the jury’s verdict, but Pepe hasn’t ruled on that request.

Thomas Stallkamp, a member of Kmart’s board and chairman of its finance committee at the time, testified that board members didn’t know the truth about Kmart’s finances leading up to the bankruptcy filing. He said it was fall of 2002 before they learned details.

“We felt that we were misled by information that Chuck gave us,” Stallkamp said.

The SEC had asked the judge earlier this year to order $22.5 million in penalties, but has lowered its request to about $13.5 million. Kmart’s board forgave a $5 million loan to Conaway when he departed in March 2002, and the SEC is seeking that amount, a fine and interest. The SEC earlier had said Kmart paid $3.88 million in tax liabilities associated with the loan, but that amount wasn’t paid.

Conaway’s lawyers say that’s still excessive. They say the maximum penalty under SEC rules is $60,000.

Besides seeking money, the SEC wants Conaway barred from serving as an officer or director at a publicly traded company.

Three businessmen who have worked with Conaway testified Wednesday as character witnesses, saying Conaway should be able to serve in that capacity. Conaway said it was unlikely that he would be asked to do that, but he promised to abide by SEC rules.

“I would in no way, shape or form be on the wrong side of any securities regulation again,” he said.

The trial centered on a conference call with analysts and Kmart’s quarterly report to regulators in November 2001. The SEC accused Conaway of failing to disclose an ill-timed purchase of $800 million in merchandise and that Kmart was delaying payments to suppliers to save cash.

Conaway testified at trial that he didn’t write or read the report and relied on his chief financial officer and others. And on Wednesday, he noted that Kmart warned investors ahead of the filing in a press release that its financial condition was worsening.

“This is as serious as it gets,” Conaway said in describing the early January 2002 statement.

The jury, however, found that Conaway acted “with intent to defraud or with reckless disregard for the truth.” Delaying payments to vendors was a “material liquidity deficiency,” the jury said, and should have been publicly reported.

Kmart was based in Troy, Mich. It emerged from Chapter 11 bankruptcy as a smaller company and now is part of Sears Holdings Corp., based in Hoffman Estates, Ill.