Jury Finds Against Former CEO of Kmart in Rare SEC Trial

On June 1, 2009, a jury returned a verdict in favor of the SEC on all charges in its case against Charles C. Conaway, the former CEO of Kmart Corp. The SEC announced today that the verdict followed a three-week trial in Ann Arbor, Michigan, before Magistrate Judge Steven D. Pepe of the United States District Court for the Eastern District of Michigan. The SEC charged Conaway with misleading investors about Kmart’s financial condition in the months preceding the company’s bankruptcy.

Specifically, the SEC alleged that, in the MD&A section, Conaway and Kmart’s former CFO, John T. McDonald, failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company’s liquidity. It alleged that this disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officer’s reckless and unilateral purchase of $850 million of excess inventory.

McDonald agreed to settle shortly before trial, consenting to a permanent injunction prohibiting further violations of those provisions of the federal securities laws, a five year officer and director bar, a $120,000 civil penalty and an administrative order suspending his privilege to appear and practice before the Commission as an accountant for three (3) years. The court will determine the appropriate remedies against Conaway at a later date.

Read the SEC’s announcement