A federal judge ordered former Kmart CEO Chuck Conaway to pay more than $10 million, ruling that he misled shareholders about the discount chain’s financial health ahead of a 2002 bankruptcy filing.
The decision came in a civil case brought in 2005 by the Securities and Exchange Commission.
While Conaway had testified that it never crossed his mind that he was withholding critical information, the SEC said he should have warned investors about plunging liquidity in a November conference call that was held less than two months before the retailer went under.
“Acts of deceit and concealment by executive corporate officers who are paid millions of dollars for their services contributes to public cynicism about corporate America,” US Magistrate Judge Steven Pepe wrote in his decision.
The ruling comes as figureheads on Wall Street — such as former Lehman CEO Dick Fuld — face similar accusations in the wake of the Wall Street banking crisis that erupted in September 2007.
“How did Lehman’s published financial statements. . . show a positive net worth of $26 billion, when the bankruptcy liquidators are saying that they are looking at a negative net worth of $130 billion?” one former Lehman executive told The Post.
In the case of Kmart, the SEC had charged that Conaway failed to tell analysts on a November 2001 conference call that the retailer was withholding payments to suppliers to shore up its dwindling cash flow.
Kmart filed for bankruptcy two months later, wiping out shareholders and sparking a restructuring that shuttered 600 stores and laid off 57,000 workers. The company has since merged with Sears.
The judge slapped Conaway with a $2.5 million fine, although that was only half of what the SEC had asked for.
Conaway was also ordered to return a $5 million loan plus about $2.7 million in interest.
“Mr. Conaway did not get a dime from Kmart that he did not earn, and there were no ill-gotten gains,” Conaway’s lawyer, Scott Lassar, said yesterday, adding that the disgraced exec would appeal the decision.
The judge stopped short of barring Conaway from being an officer or director at another public company, as the SEC had requested. Judge Pepe noted that the ex-executive is still “young and in good health” and “able to learn from his mistakes.”
“I feel the lessons learned, the hardships to him and his family, the disgorgement and the penalty, the damage to his reputation will be enough to deter any future securities violations,” Judge Pepe wrote.