SEC charges former Kmart CFO with misleading investors

The SEC has filed charges against John MacDonald, the former CFO of Kmart,
for ‘materially false and misleading disclosure about the company’s liquidity’.
The retail giant’s ex-CEO Charles Conaway has also been charged.

The charges relate to filings and an analyst conference call from the 9-month
period ending October 31 2001. The SEC is alleging that in the management’s
discussion and analysis (MD&A) section of disclosures made during the
period, Conaway and McDonald failed to disclose the reasons for an inventory
overbuy in the summer of 2001 and the impact it had on the company’s liquidity.

‘Kmart’s senior management failed to honestly inform investors that Kmart
faced a liquidity crisis in the third quarter of 2001, how the company’s own
ill-advised action had caused the problem and what steps management took to
respond to it,’ said Peter Bresnan, an associate director in the SEC’s division
of enforcement.

The SEC claims that Kmart managed its liquidity problems by slowing down
payments owed to vendors, thereby withholding $570m (£370m) from them by the end
of the third quarter.

Conaway and McDonald then allegedly lied about why vendors were not being
paid on time and misrepresented the impact that Kmart’s liquidity problems had
on the company’s relationship with its vendors, many of whom stopped supplying
Kmart during the fall of 2001, shortly before the group filed for bankruptcy on
22 January 2002.

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