The Securities and Exchange Commission yesterday filed civil fraud charges against three former Kmart Corp. executives and five employees of companies that supplied the Troy, Mich., retail chain, accusing them of scheming to inflate Kmart's profit by $24 million in 2001.
Regulators said Kmart workers colluded with confederates at Eastman Kodak Co., Coca-Cola Enterprises Inc. and subsidiaries of Pepsico Inc. to improperly accelerate promotional and marketing payments from the suppliers. Some of the defendants conspired to lie to Kmart's auditors at PricewaterhouseCoopers LLP by signing false accounting documents, the SEC said.
Kmart grew "increasingly dependent" on promotional payments in the years before it filed for bankruptcy court protection in 2002, the SEC complaint said. "Unrealistic" earnings targets set by top Kmart managers compounded the "tremendous pressure" to collect supplier payments, it said. Kmart emerged from bankruptcy protection last year as Kmart Holding Corp. and recently announced a bid to acquire Sears, Roebuck and Co.
Michael Frank and Albert M. Abbood, former executives in Kmart's food division, settled the charges yesterday without admitting or denying wrongdoing. A third former Kmart official, photo division vice president John Paul Orr, is contesting the SEC's allegations.
Russell C. Weigel III, a lawyer for Orr, said the case against him is "factually unsound."
Regulators also charged former Eastman Kodak vice president Darrell J. Edquist, former Frito-Lay sales director Thomas L. Taylor and former Frito-Lay account manager Randall Stone. Each settled without admitting or denying the allegations.
The defendants who settled agreed to pay a total of $160 million in civil penalties. Frank, who did not turn over money because of his inability to pay, agreed to a five-year ban on serving as an officer or director of a public company.
Civil charges against David C. Kirkpatrick, a former sales director for Coca-Cola, and David N. Bixler, a vice president at Pepsico, will proceed, the SEC said.
Sean M. Walsh, a lawyer for Kirkpatrick, said there is "simply no merit" to the charges and that he will vigorously defend against them.
SEC officials cited e-mail messages in January 2001 between Abbood and Kirkpatrick, in which the Coca-Cola salesman allegedly agreed to help Kmart plug a $5 million shortfall. "I'll bring the donuts and the checkbook," Kirkpatrick wrote.
Regulators said their investigation of Kmart is continuing. Stephen Pagnani, a spokesman for the company, declined to comment. Lawyers for the defendants did not return calls or could not be located for comment.
The alleged supplier fraud at Kmart mirrors similar accusations in the food service industry, including a long-running investigation of Dutch retailer Royal Ahold NV, which controls Giant Food and U.S. Foodservice Inc. of Columbia. Ahold settled civil charges with the SEC earlier this year without paying a fine, but authorities continue to investigate former U.S. Foodservice employees and suppliers.