Story from Bloomberg
Kmart Corp. former Chief Executive Officer Charles Conaway was found liable by a federal jury for misleading investors about the company’s cash crisis in the months before its 2002 bankruptcy.
The U.S. Securities and Exchange Commission, which seeks to bar Conaway from ever serving as an officer of a publicly traded company, sued him in 2005, alleging he duped investors in a third-quarter 2001 securities filing and during a Nov. 27, 2001, conference call.The case was “a matter of credibility and accountability,” Alan Lieberman, an SEC lawyer, said after today’s verdict. “This jury held Mr. Conaway accountable for his own conduct.”
The jury of five men and five women delivered the verdict near the end of the first full day of deliberations in the trial in federal court in Ann Arbor, Michigan. U.S. Magistrate Judge Steven Pepe will determine what penalty to impose.
Conaway’s attorney, Scott Lassar said he was “very disappointed in the verdict.” Conaway plans to appeal, said Lassar.
‘Dodged Information’
Conaway “dodged inconvenient information,” Lieberman told jurors in closing arguments last week. “He knew when to deny and blame others and say ‘Nobody ever told me.’”Kmart filed for bankruptcy protection on Jan. 22, 2002, after fourth-quarter sales fell, the surety bonds market evaporated and some suppliers halted shipments. Conaway was fired two months later. Kmart subsequently shed 599 stores and fired about 57,000 workers.
The SEC alleged that Conaway hid the fact the company was short of cash and had a program to delay payments to vendors. Lassar said in his closing argument that the regulator’s case against his client is “ridiculous.”
“There was no liquidity crisis at Kmart” at the time, Lassar argued.
Conaway claimed in testimony last week that he wasn’t involved in preparing the quarterly report. He said he was focused on saving the struggling retailer before the bankruptcy.
“Liquidity was in excellent shape,” Conaway testified. “Better shape than in prior years.” Kmart had caught up by the third quarter, he said. “It wasn’t an issue.”
Bankruptcy Exit
The company exited bankruptcy in May 2003. Kmart Holding Corp. later bought Sears, Roebuck & Co., creating Sears Holdings Corp., based in Hoffman Estates, Illinois.
The government alleged that Kmart began delaying payments to vendors to ease a cash crunch caused by an “extraordinary” $850 million inventory purchase by Kmart’s chief operating officer, without the knowledge of other top Kmart managers, in the summer of 2001.
After delivering the verdict, three jurors who declined to give their names agreed that the videotaped testimony of former Kmart chief financial officer Jeffrey Boyer was particularly important in their verdict against Conaway.
Boyer testified that he was fired after telling Conaway about liquidity problems at the company. The conversation came before Conaway’s November 2001 conference call with analysts, Boyer testified.
The case is Securities and Exchange Commission v. Conaway, 05-cv-40263, U.S. District Court, Eastern District of Michigan (Ann Arbor).
