Former Kmart execs face securities fraud charges

DETROIT -- Two former Kmart Corp. executives were charged with securities fraud Wednesday for allegedly inflating the earnings of the now-bankrupt discount chain by $42.3 million two years ago.

Enio Montini Jr., 51, and Joseph Hofmeister, 52, were also charged with lying to the Securities and Exchange Commission and conspiracy. They are believed to be the first people charged with wrongdoing in the fallout from Kmart's 2002 bankruptcy and an investigation of its finances.

The SEC filed a separate accounting fraud complaint against the men, seeking to recoup financial gains related to the alleged actions, including a $750,000 loan that Montini received from Kmart.

An attorney for the men called the charges "wrong and unjust." If convicted, Montini and Hofmeister each face up to 10 years in prison and a $1 million fine on the securities fraud charge, and five years in prison and a $250,000 fine for the conspiracy and false statements charges.

Montini is a former senior vice president and general merchandise manager for Kmart. Hofmeister is a former divisional vice president of merchandising.

Authorities said the two conspired to have the company improperly include a $42.3 million payment from one of its vendors, American Greetings, in its financial report for the second quarter of 2001.

The money should not have been fully booked by Kmart in that quarter, prosecutors said. Instead, the defendants lied to Kmart's bookkeepers, who filed a report with the SEC that overstated Kmart's results and helped the company meet Wall Street's expectations.

U.S. Attorney Jeffrey Collins, who read from a prepared statement and left without taking questions, told reporters: "These two individuals made false statements to Kmart's accounting division."

Kmart later restated its 2001 earnings, saying only that it was to change the way it reports vendor discounts.

In a statement for Montini and Hofmeister, attorney Mark Srere denied that the pair engaged in fraud and said neither man received "personal gain" from Kmart's decision to record the $42 million as revenue.

Both men were let go by Kmart in 2002, a few months after it declared bankruptcy. At the time, the retailer said the cuts were part of an effort to streamline management. A Kmart spokesman declined comment Wednesday.

Montini went to work for Rite Aid Corp., where a spokeswoman said he resigned Wednesday as senior vice president of category management.

Kmart has been under investigation by the SEC and the FBI.

On Tuesday, the company said it found evidence supporting possible legal against former chief executive Charles Conaway for what it described as failure to perform his duties, including allegedly permitting executives to receive nearly $24 million in retention loans and other payments.

Conaway denied the allegations.

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