SEC, ex-Kmart CEO back to court for penalty phase in civil fraud case

SEC wants judge to order big penalty in Kmart case

ANN ARBOR, Mich. — A Securities and Exchange Commission lawyer told a federal court on Wednesday that the ex-head of Kmart Corp. should pay millions of dollars for misleading investors about the retailer’s financial health in 2001.

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

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 still hasn’t taken responsibility.

Conway “never once even extended the notion — even in hindsight — that there might have been a better way,” Lieberman said.

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

Conaway, who was in court for Wednesday’s hearing, could take the stand later in the day.

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 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.

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. He said it never crossed his mind that he was withholding critical news.

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