DETROIT — Federal regulators are seeking more than $22 million from the former head of Kmart Corp., who was found liable for misleading investors about the company's finances before a bankruptcy filing in 2002.
In a court filing, the U.S. Securities and Exchange Commission is asking a judge to punish Charles Conaway for "intentionally lying" to Wall Street and concealing information from Kmart directors.
The SEC accused Conaway of failing to disclose that Kmart was delaying payments to suppliers to save cash in late 2001. In June, a federal jury in Ann Arbor, Mich., ruled in favor of the government.
"Even if the fraud may not have caused Kmart's bankruptcy, there is ample evidence that the fraud contributed to it," SEC lawyer Alan Lieberman wrote last week.
"And there is no question that the fraud prevented investors from anticipating the filing and avoiding the loss of their investments," he said.
Kmart's board forgave a $5 million loan to Conaway when he departed in March 2002 and also paid $3.88 million in tax liabilities associated with it. The government is seeking that sum, plus interest, as a recovery of "ill-gotten gains."
The loan would not have been forgiven if Kmart's board knew he was hiding information, Lieberman said.
In addition, the SEC wants U.S. Magistrate Judge Steven Pepe to order an $8.8 million fine. Together, it all adds up to $22.56 million.
"There should be no disgorgement because there are no ill-gotten gains," Conaway's lawyer, Scott Lassar, said Monday.
"What Chuck did in delaying payments to vendors was in the best interests of Kmart and its shareholders," he said. "There was no loss to anyone from Chuck's activity. The bankruptcy was caused by factors completely unrelated to the events of fall 2001."
The hearing on possible financial penalties is set for Sept. 16. On Aug. 12, Lassar will argue for a new trial.
The May trial centered on Conaway's conference call with analysts and Kmart's quarterly report to regulators, both in November 2001.
The SEC blamed Conaway for not sharing details in the management-analysis section. He testified that he didn't write it, didn't read it and relied on others.
During a call with Wall Street analysts, Conaway said sales were poor, but he didn't talk about the slow-pay strategy with vendors or an ill-timed purchase of $800 million in merchandise.
Besides seeking money, the SEC wants Conaway, 49, barred from serving as an officer or director at a publicly traded company.
"Conaway chose deception over candor," Lieberman wrote. "When Kmart needed forthright leadership, Conaway set the company on a course of lies and half-truths that ultimately led to the largest retail bankruptcy filing in U.S. history to that time."
Kmart now is part of Sears Holdings Corp., based in Hoffman Estates, Ill.