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Former Kmart CEO Charles Conaway and CFO John McDonald have been charged by the US Securities and Exchange Commission (SEC) with securities fraud and aiding and abetting securities fraud. They are accused of making “materially false” statements and misleading investors about the company’s pre-bankruptcy finances.

Conaway and McDonald are said to have not disclosed to shareholders why the company made a “massive inventory overbuy” to the tune of $850 million in 2001 and how those purchases affected its liquidity. The company had falsely said that the raised inventory levels were because of seasonal fluctuations, according to the SEC.

The SEC also says that Conaway and McDonald spearheaded the company’s decision to slow down payments to vendors, and then lie about why those payments were being reduced or withheld.

Conaway and McDonald left the company after it declared bankruptcy in 2002. The new management had no comment on the charges. Attorneys for both men said they expect to be cleared of all charges.

The SEC charges came just a week after the Detroit News reported that Conaway was cleared by arbitrators of charges made by former shareholders that he was guilty of negligence, mismanagement and essentially looting the company for his own benefit.

Those charges were made by the Kmart Creditors Trust, representing in part the shareholders who lost $4.5 billion when the company became the largest retailer ever to file for bankruptcy in January 2002. In addition to clearing Conaway, the ruling also made it possible for him to recover his legal expenses from the trust.

This is not a case of fraud, deliberate mismanagement or corporate looting," wrote the panel. "The evidence shows that Conaway acted at all times in good faith and in what he believed to be the best interests of Kmart. He made a determined, albeit unsuccessful, attempt to accomplish what he was hired to do -- stop Kmart's long decline ... turn the company around ... and restore it to its former position as one of the nation's preemiminent retailers."
KC's View:
We said it back when Kmart declared bankruptcy, and we repeated it even in the face of the decision by the arbitrators to absolve Conaway of all culpability. The previous management there seemed far more concerned about covering its own flanks and protecting its own financial interests than it was with the investors and employees to whom they were responsible.

St. Thomas Aquinas said it best.

“Justice is a certain rectitude of mind whereby a man does what he ought to do in the circumstances confronting him.”

While little will help the investors who lost phenomenal amounts of money and employees who lost their jobs as Kmart imploded, we hope that some measure of justice is done here.