Jury to Be Selected for Trial of Ex-Kmart Execs

Eight months after the first criminal charges to come out of the federal probe into Kmart Corp.’s Chapter 11 bankruptcy case, a jury could soon begin hearing arguments about whether two former executives conspired to inflate the discount retailer’s earnings.

Enio A. “Tony” Montini Jr., 51, and Joseph Hofmeister, 53, are accused of securities fraud, conspiracy and making false statements to the Securities and Exchange Commission.

Their trial, which is expected to last at least a month, is scheduled for jury selection Tuesday.

If convicted, Montini and Hofmeister each face a maximum sentence of 10 years in prison and a $1-million fine on the securities fraud charge. The conspiracy and false-statements charges carry maximum penalties of five years in prison and a $250,000 fine.

The government says Montini and Hofmeister helped Kmart meet Wall Street’s earnings expectations during the second quarter of 2001 -- boosting its earnings by 6 cents a share -- by causing the company to improperly record a $42.3-million payment from vendor American Greetings Inc. Kmart declared bankruptcy in January 2002.

Montini is a former senior vice president and general merchandise manager of Kmart’s drugstore division, and Hofmeister is a former divisional vice president of merchandising.

In 2000, the government says the two men negotiated with American Greeting and Hallmark Cards Inc. to make one of the companies Kmart’s sole supplier of greeting cards. A five-year deal making American Greetings the supplier brought Kmart the $42.3-million payment in second quarter 2001.

According to the government, the men’s statements to Kmart’s accounting and auditing divisions about the payment resulted in Kmart’s filing of a fraudulent quarterly report with the SEC. In May 2002, Kmart restated its earnings in part because of the payment, which prosecutors say should have been spread over five years.

But lawyers for the men argue that they were following Kmart’s accounting procedures. Furthermore, they say the decision on how to handle such a payment -- which the government says shouldn’t have been fully booked in the quarter -- is an issue that hasn’t been resolved among accountants.

“Put simply, there is no crime,” the lawyers wrote in court filings.

Kmart closed nearly 600 stores and shed 57,000 employees after filing for bankruptcy protection. It emerged from bankruptcy in May as Kmart Holding Corp. and has been trying to put its bankruptcy behind it, with company officials saying it will return to profitability next year.