SEC Accuses 8 of Fraud at Kmart

Federal regulators Thursday filed civil fraud charges against three former Kmart Corp. executives and five current and former managers of big vendors, saying they engineered a $24-million accounting fraud by the retailing giant in 2000 and 2001.

The Securities and Exchange Commission, which has been investigating Kmart’s decline into bankruptcy-law proceedings in 2002, said the discount retailer inflated earnings by improperly booking millions of dollars of payments from the vendors -- Eastman Kodak Co., Coca-Cola Enterprises Inc., and PepsiCo Inc. and its Frito-Lay division.

Five of those charged settled the SEC’s charges Thursday by agreeing to pay civil fines totaling $160,000 and to refrain from future violations of securities laws.

In one case, a former Kmart vice president was prohibited for five years from serving as an officer or director of a public company.

The executives, who left the company before or shortly after Kmart’s bankruptcy filing in January 2002, neither admitted nor denied wrongdoing.

Charges are pending against the other three executives: John Paul Orr, a former vice president of Kmart’s photo division; David C. Kirkpatrick, a former national sales director for Coca-Cola; and David N. Bixler, a former national sales director of PepsiCo’s Pepsi-Cola division and current vice president and general manager of PepsiCo.

Attorneys for Orr and Kirkpatrick disputed the SEC’s allegations and said they would be contested.

Bixler’s attorney didn’t immediately return a telephone call seeking comment.

Troy, Mich.-based Kmart, home of the blue-light special and Martha Stewart’s line of linens and kitchenware, rebounded from bankruptcy protection last year as Kmart Holding Corp. It will be the nation’s third-largest retailer when it completes a planned $11-billion acquisition of rival Sears, Roebuck & Co. announced last month.

Kmart spokesman Stephen Pagnani declined to comment on the SEC’s action.

In a lawsuit filed in federal court in Detroit, the SEC accused the eight executives of causing Kmart to issue false financial statements by improperly accounting for millions of dollars in vendor “allowances” before the company’s bankruptcy filing. The vendors paid Kmart the fees for promotional and marketing activities, according to the SEC.

The deceptive scheme caused Kmart to overstate by $24 million, or 10%, its earnings for the fourth quarter and fiscal year ended Jan. 31, 2001, the SEC alleged.

The executives caused Kmart to prematurely book the vendor payments on the basis of false information provided to the company’s accounting department, the agency said. It said several vendor company managers took part in the fraud by signing false and misleading accounting documents.

The executives agreeing to settlements with the SEC were:

* Michael K. Frank, a former vice president and general merchandise manager of Kmart’s food division, who accepted a five-year ban from serving as a public company officer or director. Frank was not fined because he demonstrated he was unable to pay, the SEC said.

* Albert M. Abbood, a former vice president of non-perishable products in Kmart’s food division, who agreed to pay a $50,000 civil fine.

* Darrell Edquist, a former vice president and general manager of Eastman Kodak, a $55,000 fine.

* Randall M. Stone, a former national account manager at Frito-Lay, a $30,000 fine.

* Thomas L. Taylor, a former director of sales at Frito-Lay, a $25,000 fine.