business news in context, analysis with attitude

The US Securities and Exchange Commission (SEC) has filed civil fraud charges against three former Kmart executives and five current and former vendor executives from Coca-Cola, Eastman Kodak, Pepsi and Frito-Lay, accusing them of crafting a $24 million accounting fraud scheme. The fraud involved the improper booking of million of dollars in promotion payments by the vendors to Kmart in 2000 and 2001, which allowed the retailer – which went into bankruptcy in 2002 – to inflate its earnings numbers.

Five of the executives signed settlement agreements with the SEC without admitting or denying wrongdoing. They will pay a total of $160,000 in civil fines and, according to press reports, agreed not to break securities laws again.

The executives agreeing to settlements with the SEC were: Michael K. Frank, a former vice president and general merchandise manager of Kmart's food division, who also accepted a five-year ban from serving as a public company officer or director; Albert M. Abbood, a former vice president of non-perishable products in Kmart's food division; Darrell Edquist, a former vice president and general manager of Eastman Kodak; Randall M. Stone, a former national account manager at Frito-Lay; and Thomas L. Taylor, a former director of sales at Frito-Lay.

No settlement has been reached and charges remain pending against the other three executives: John Paul Orr, a former vice president of Kmart's photo division; David C. Kirkpatrick, a former national sales director for Coca Cola, and David N. Bixler, a former national sales director of PepsiCo's Pepsi-Cola division and current vice president and general manager of PepsiCo.

At this point, all the charges are against the individuals and not against the vendor companies.

Kmart has emerged from bankruptcy, and has been improving its profitability figures even while watching its sales numbers decline, a phenomenon attributed to cost cutting and a series of real estate sales. The company has announced plans to merge with Sears.
KC's View:
We wonder if the real problem here isn’t the specific fraud, but the fact the food industry has countenanced for too long a system of financial three card monte that has allowed – even encouraged – this kind of stuff to take place.

Even without indictments, too many companies have created the illusion of profitability by engaging in this nutty game of promotional allowances and fees that, in the end, defrauds investors and customers.

It is absurd. And it has to stop.