KMart reports evidence of wrongdoing
Internal investigation uncovers evidence of "grossly derelict" actions by former top managers.
January 26, 2003: 11:00 PM EST
By Ceci Rodgers, CNNfn Correspondent

CHICAGO (CNN) - Kmart has found evidence of possible wrongdoing in its ongoing internal investigation into accounting and management practices of 23 former top managers and employees, the company said.

In a statement filed with its reorganization plan in federal bankruptcy court late Friday, Kmart said it is establishing a trust to handle possible legal claims by creditors because of the actions of the former managers, which they characterized as "grossly derelict."

Among the findings of the investigation, handled by Kmart's outside counsel, were that:

Related story
Kmart files bankruptcy exit plan

-- Former management, under former Kmart chief executive Charles Conaway, purposely slowed payments to vendors in the fall of 2001 as a cash crunch was developing at the company. They then lied to the vendors about why they were not being paid and denied them access to computerized records.

-- Senior managers deceived Kmart's board of directors about the terms of $24 million in retention loans paid to senior executives, also in the fall of 2001.

Former CEO Conaway received $5 million; President and COO Mark Schwartz $3 million; four senior executives received $2.5 million each, seven others each got $750,000, and the remaining 12 managers received loans in amounts from $300,000 to $700,000 apiece.

-- Kmart managers inflated financial forecasts in the 4th quarter of 2001, often by browbeating subordinates to pressure suppliers for money, known as vendor allowances, and then not paying the vendors for their goods. Investigators found at least $92 million in such vendor allowances in 2001 that were considered questionable. In one instance, an improperly recorded vendor payment required a significant adjustment of Kmart's 3rd and 4th qtr financial statements.

-- One senior executive oversaw "excessive" purchases of inventory in the summer of 2001, without the knowledge of Kmart's treasury officials, to the tune of $850 million, which investigators said substantially contributed to the company's liquidity crisis that fall.

--Kmart executives played fast and loose with personnel decisions -- often hiring employees without the proper applications, background information or interviews -- and then offered them exorbitant compensation packages. "Many of these hires proved unqualified for their positions and ultimately were terminated," Kmart said in its statement.

-- One former executive improperly accepted a "substantial payment" from a consultant to Kmart. - The former executives spent $12 million to buy corporate aircraft in 2001, even though the money was not approved in Kmart's capital budget. Then, executives used the planes for personal travel -- often masking the trips by taking along Kmart personnel who otherwise had no need to travel -- and saying they were visiting various Kmart stores. Former CEO Conaway left in March and was replaced by James Adamson. He stepped down suddenly Sunday and Kmart appointed Julian Day the new chief executive.

Kmart plans to close 326 stores and one distribution center and fire as many as 37,000 workers in the next two months. Last year, the company closed 283 stores and cut more than 22,000 jobs. In its reorganization plan filed in bankruptcy court, Kmart revealed that its plan relies mainly on funding from two investors: hedge fund ESL Investments Inc. and the Third Avenue Value Fund. The company said it expects to return to profitability in 2004.  Top of page

  More on NEWS
Premier League revenues hit record high $6.4 billion
Window seat or aisle? After Southwest incident, some fliers think twice
Oops! Deutsche Bank accidentally sent a $35 billion payment
Wells Fargo will be fined $1 billion
YouTube ran ads from hundreds of brands on extremist channels
Oops! Deutsche Bank accidentally sent a $35 billion payment

graphic graphic