Grand Jury Reportedly Is Probing Kmart
A federal grand jury in Detroit is reportedly probing Kmart Corp.’s spectacular slide into bankruptcy protection while federal investigators examine whether the company’s former top two executives--who together received $34 million in compensation in less than two years--should face criminal charges for their role in the downfall of the discount retailer.
More than 20 subpoenas have been issued for witnesses, bank records and other documents, according to a report in the Detroit News citing unidentified federal sources. Federal officials told the newspaper that as many as 200 subpoenas could be issued in the investigation, which could last six more months.
Investigators are looking into whether Kmart executives hid the company’s financial condition from its board of directors, employees and shareholders.
“The public can rest assured that we are actively and aggressively pursuing this matter,” FBI spokeswoman Dawn Clenney told the Detroit News. The FBI is working with investigators with the Securities and Exchange Commission, and a U.S. House subcommittee is gathering evidence for a separate Kmart inquiry.
Federal officials on Sunday declined to comment on the probe.
Kmart filed for Chapter 11 bankruptcy protection on Jan. 22 after a lackluster holiday season sent the company’s stock into a free fall. The Troy, Mich.-based retailer laid off more than 22,000 people earlier this year and shuttered 284 stores nationwide.
The Detroit News’ articles detailed compensation packages received by former Chief Executive Chuck Conaway, former President Mark Schwartz and other top executives. While the company was losing billions, executives purchased two new corporate jets and approved a company vehicle program that allowed executives to drive Jaguars and Land Rovers.
Conaway and Schwartz were fired earlier this year. The FBI has since interviewed both men, according to the newspaper. Neither Conaway or Schwartz could be reached for comment, and Kmart executives declined to elaborate on the probes.
“We’ve been fully cooperating with the SEC investigation and with the U.S. attorney’s office investigation,” Kmart spokesman Jack Ferry said Sunday. He added that the company has been “conducting our own investigation into past practices of the former management team under Chuck Conaway and Mark Schwartz.”
Conaway was hired in May 2000 to turn around the company, which had been consistently losing ground to competitors. His package included a $1.4-million annual salary, $6 million in upfront cash and stock bonuses, and a restricted stock award worth $5.4 million at the time. After one year’s service, Conaway received an additional $5-million retention loan to keep him from leaving the company.
From May 2000 until he was fired in March, Conaway collected nearly $23 million in compensation.
Schwartz was hired by Conaway in September 2000 to help Kmart compete with industry leader Wal-Mart Stores Inc. even though three of Schwartz’s previous companies wound up in Bankruptcy Court. The circumstances of Schwartz’s hiring have become a key focus of Kmart’s internal stewardship review, according to the newspaper.
During his 16-month stint with Kmart, Schwartz received $10.8 million from the company, including a $1-million retention bonus after three months with the company.
The Detroit News reported that while Conaway lived in a 29-room mansion in Oakland Township, Mich., complete with a lake with fountains and tennis courts, he billed Kmart for $523,000 in “temporary housing and living costs.”
Kmart Chairman and Chief Executive James Adamson, the outside director who replaced Conaway, has promised cooperation with investigators. But Adamson acknowledged that he and other directors don’t have answers to many of the questions about Conaway and Schwartz.
“We weren’t told everything,” Adamson said in late July. “There are a lot of things that took place where I wish that the management team had been more forthright.”
