Kmart S.E.C.

Names 8 in Kmart Accounting Case

Published: December 3, 2004

he Securities and Exchange Commission brought accounting fraud charges yesterday against three former Kmart executives and five representatives of companies that supplied Kmart with brand-name products. Federal regulators accused the Kmart executives of prematurely booking promotional allowances from suppliers like Coca-Cola Enterprises, PepsiCo and Eastman Kodak, allowing it to increase profits for the fourth quarter of 2001 by $24 million. Representatives of at least four companies selling to Kmart participated in the accounting scheme, the complaint said, by furnishing misleading documents and making side agreements that hid the true nature of their deals from Kmart's auditors and investors. Five of the eight people named in the complaint have reached separate settlements with the S.E.C., each accepting civil penalties of up to $55,000 without admitting or denying wrongdoing. The others said that they should not be named in the complaint, which raised questions about six separate financial arrangements.

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"There are lots of nuances to these cases, but the message is the same: the conduct should not happen," said Cheryl Scarboro, an assistant director in the S.E.C.'s enforcement division. "Kmart could not do this without the help of these vendors." Kmart did not return phone calls seeking comment. The four main suppliers named in the suit said they were cooperating with investigators. The S.E.C.'s complaint, which was filed yesterday in federal court in Detroit, is the latest step in its effort to clean up accounting practices in the consumer products industry. Over the last few months, federal regulators have settled similar charges against executives at Fleming, the Dallasbased grocer, and Royal Ahold, the Dutch supermarket group, and at least 10 of those companies' suppliers have been under investigation. Although $24 million may seem like a small sum to a large retailer like Kmart, which last month agreed to buy its rival Sears in an $11 billion merger, regulators said the income - about 10 percent of its fourth-quarter earnings in 2001 - was badly needed as it struggled to turn a profit.

as anyone else.E. of signing several misleading forms to advance more than $3 million worth of allowances. Kirkpatrick. has reached settlements with some of the representatives on the other side of the deals: David N. branch chief who led the investigation. Kirkpatrick. accuses of constructing a similar arrangement with Walsh said. Sean Walsh. the former national sales director at Coca-Cola Enterprises. and representatives of the other vendor employees either did not return phone calls or could not be reached. said through his lawyer. and Thomas L.C." Mr. "This case shows that you need to take a hard look at the retail company but also the people doing business with that company. deceiving Kmart's outside auditor. a Kodak vice president. They were accused of providing misleading documents. The S. the former national sales director for PepsiCo's beverage unit. Weigel said. John Paul Orr.'s charges stem from an internal investigation that began while it was in Chapter 11. executing side agreements and. Michael K. Mr. Abood.C. Stone. The S. executives in the Frito-Lay unit of PepsiCo. Edquist declined to comment." Colin Moynihan contributed reporting for this article. http://www.E. in some cases.E.C. Frank did not return phone calls seeking comment. Muio. Russell C. and we think that the complaint is unsound." said Reid A.E. Taylor and Randall M. accused David C.html . a lawyer representing Mr. Weigel III.Kmart filed for bankruptcy protection in January 2002. two former vice presidents for Kmart's food division.C. Abood and a lawyer for Mr. that he was not considering a settlement. "We are disappointed that the S.E. said that his client had no personal incentive to participate in such a scheme. A lawyer for Mr. or did not do. "David is as much a victim of what Kmart did. an S.C. pursued this matter.C.nytimes. "He was never aware of what Kmart planned to do with the advertising revenue it received from Coke. Darrell Edquist. a Kmart vice president whom the S.E.E. reached separate settlements with federal regulators over accusations that they allowed at least $12 million in promotional allowances from vendors like Coca-Cola Enterprises and PepsiCo's beverage unit to be prematurely booked. Bixler.C. Frank and Albert M. The S." Mr. and the S. said yesterday that its investigations would continue.

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