Two former vice presidents of Kmart Holding Corp. concealed a vendor side agreement to inflate earnings to meet analysts' expectations, federal prosecutors told jurors Monday as the executives' fraud trial began in Detroit.
The two, Enio Montini Jr. and Joseph Hofmeister, are the first executives to be charged as a result of a continuing federal investigation into alleged accounting fraud at Kmart, the third-largest U.S. discount retailer.
Montini and Hofmeister are charged with deceiving investors about a payment from American Greetings Corp. so that Troy, Mich.-based Kmart could book $42.3 million in revenue in the second quarter of 2001, Assistant U.S. Atty. Billy Jacobson told the jury.
"The defendants deceived their colleagues, their company and the public in order make themselves, their business unit and Kmart look better to the public at large," Jacobson said in U.S. District Court. "And that's fraud."
Montini's lawyer, Jonathan Graham, said Montini and Hofmeister had no motive to conceal the side agreement or inflate Kmart earnings because there was no formula in place to give them a bonus or salary increase for any rise in earnings.
"Tony Montini didn't lie about anything; he didn't hide anything," Graham said.
Hofmeister did nothing wrong either, his attorney, Mark Srere, told jurors.
After a restatement that included the $42.3 million, Kmart Corp. filed for bankruptcy protection in January 2002. During its reorganization, Kmart closed 599 stores, or almost one-third of its locations, and fired about 57,000 workers.
The retailer is relying on brands such as Martha Stewart Everyday housewares and clothing by Mexican singer Thalia Sodi to attract customers. The company emerged from bankruptcy proceedings in May as Kmart Holding Corp.
The vendor contract in question included a payment to Kmart in June 2001 to ensure shelf space for American Greetings cards in Kmart stores, the government alleged. Federal prosecutors and the Securities and Exchange Commission have charged the defendants with concealing a letter giving American Greetings a partial refund under certain circumstances.
The company booked the full amount as revenue in the quarter ending Aug. 1, 2001, which had the effect of inflating earnings, the government charged.
"These deceptions caused Kmart to overstate earnings by $0.06 a share and enabled the company to meet analysts' expectations for the quarter," the SEC said in its civil complaint.
The SEC said it was continuing its investigation.