This week the federal Securities and Exchange Commission filed civil fraud charges against three former Kmart Corp. executives and five current and former managers of brand name vendors, charging the group arranged a $24 million accounting fraud several years ago. The SEC has been investigating Kmart’s bankruptcy filing in 2002. The SEC charges that Kmart overstated its earnings by improperly booking millions of dollars of payments from Eastman Kodak Co., Coca Cola Enterprises Inc., and PepsiCo Inc. and its Frito-Lay division. The accused former executives decided to end the case by settling with the SEC and paying fines totaling $160,000, and to refrain from future violations of securities laws. One former Kmart vice president was given a five year ban from serving as an officer or director of a public company. Several of the defendants have not agreed yet to settle. 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. According to the Associated Press, the deceptive scheme caused Kmart to overstate by $24 million, or 10%, its earnings for the fourth quarter and fiscal year ending Jan. 31, 2001. The vendor payments were prematurely booked on the basis of false information provided to the company’s accounting department by the defendants. Several vendor company managers took part in the fraud by signing false and misleading accounting documents.
This financial scam couldn’t come at a better time, as Kmart and Sears announced their double-suicide pact, to see if a combined company could die off faster than the two separate entities. This latest scandal puts the blue light in more bad light. Move over, Martha Stewart. How many Kmart execs can you fit into a jail cell?