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Published: Thursday, 5/14/2009

SEC vs. ex-Kmart CEO in civil trial under way in Ann Arbor


ANN ARBOR, Mich. Problems that led to one of the largest bankruptcies in retail history are being replayed in a federal courtroom as U.S. regulators accuse the former head of Kmart Corp. of lying to investors and directors about the health of the company in 2001.

Charles Conaway could be fined and barred from serving as an officer or director of a public company if the Securities and Exchange Commission wins the civil trial, which likely will last a month or more.

Conaway, a turnaround specialist, was Kmart's chairman and chief executive from May 2000 to March 2002 as the retailer struggled to compete against Target and Wal-Mart.

He's accused of failing to disclose the true nature of Kmart's perilous finances in the months leading to a bankruptcy filing in January 2002.

On Thursday, the second day of trial, jurors watched a videotaped deposition of Mark Moreland, who was the assistant treasurer. He acknowledged that details about liquidity problems in fall 2001 were not shared with company directors or Wall Street analysts.

There is no dispute that Kmart was under a severe cash crunch after acquiring $850 million in excess inventory. The SEC blames Conaway for Kmart's failure to disclose the true extent of its woes in a quarterly filing with regulators and on a conference call with stock analysts.

More than $1 billion in payments to suppliers were delayed, but Kmart blamed it on computer problems not poor cash flow, the SEC says.

"Conaway was the leader who set management on the path of lies and concealment," SEC lawyer Alan Lieberman said in a court document.

Conaway's lawyer said he had "nothing whatsoever to do" with the management-analysis section of Kmart's filing with the SEC.

"Mr. Conaway's job was running the company," not preparing reports for regulators, Scott Lassar said in a court document ahead of trial.

Lassar and Conaway declined to comment during a break in the case Thursday. The former CEO is expected to testify later in the trial.

Kmart's former chief financial officer, John McDonald Jr., recently agreed to pay a $120,000 penalty to settle the SEC's lawsuit against him. He and former company directors could be called as witnesses against Conaway.

Kmart, which once had 250,000 employees and 2,100 stores, now is part of Sears Holdings Corp., based in Hoffman Estates, Ill. It has 1,360 stores and more than 133,000 workers.

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