Two former executives at Kmart Corp. were charged Wednesday with a $42.3-million securities fraud allegedly executed to meet their division's financial targets.
The indictments are the first from a federal probe of accounting practices at the retailer in the period leading up to its January 2002 bankruptcy filing.
Legal experts said the indictments could be a tactic to get lower-level former Kmart managers to give evidence against senior executives.
The alleged fraud led to Kmart understating its 2001 second-quarter loss, allowing it to meet Wall Street analysts' financial targets, according to the federal indictment. It charged Enio Montini and Joseph Hofmeister with securities fraud, making false statements to the Securities and Exchange Commission and conspiracy.
Montini, a former senior vice president and general merchandise manager for Kmart's drugstore business, and Hofmeister, a vice president within the same division, face criminal charges and an SEC lawsuit. They were both dismissed by Kmart in May.
Montini, who was hired in October by drugstore chain Rite Aid Corp. as a senior vice president, resigned from Rite Aid on Wednesday.
A lawyer for Montini and Hofmeister called the allegations "wrong and unjust," and said that neither man received any personal gain from Kmart's decision to record the $42 million as revenue for the second quarter.
A Kmart spokesman said the company was cooperating fully with government investigators. Kmart has since restated earnings for the 2001 second quarter to properly account for the payment.
If convicted, the two former executives face a maximum of 10 years imprisonment and a $1-million securities fraud fine, and five years in prison and a $250,000 fine for the conspiracy and false statement charge, the Justice Department said.
The indictments come a day after Kmart accused former Chief Executive Charles Conaway of failing to warn directors of a liquidity crunch in the months before Kmart filed for bankruptcy protection.