DETROIT -- Two former Kmart vice presidents were indicted here last week for their alleged role in a $42 million accounting misstatement that contributed to the chain's escalating financial problems.
Enio Montini Jr., 51, and Joseph Hofmeister, 52, were charged with securities fraud, making false statements to the Securities and Exchange Commission, and conspiracy, according to the three-count indictment unsealed by the U.S. Attorney's office here. Both are Michigan residents.
If convicted, Montini and Hofmeister face maximum prison terms of 10 years and fines of up to $1 million on the securities fraud charge. The false statements and conspiracy charges carry lesser penalties of up to five years in prison and fines of $250,000 each.. Montini was senior vice president and general merchandise manager of Kmart's drug store division. Hofmeister was the vice president of merchandising within the same division. They left the company last May as part of a corporate restructuring.
Montini and Hofmeister were scheduled to testify in December in connection with Kmart's internal investigation, but elected to assert their Fifth Amendment right not to testify, according to papers filed by Kmart with the bankruptcy court last month.
According to the indictments, the two defendants allegedly negotiated a multiyear contract with American Greetings, Cleveland, to be Kmart's sole supplier of greeting cards. American Greetings' only competitor, which held 40% of Kmart's business, had been Hallmark, Kansas City, Mo. Under the terms of the contract, which was signed the day before Kmart filed its Chapter 11 bankruptcy petition, American Greetings paid Kmart an "allowance" of $42.35 million on June 20, 2001. The payment represented a $50,000 takeover allowance for each store that had been stocked by Hallmark.
The $42.35 million was subject to repayment under certain circumstances, such as liquidated damages in the event Kmart terminated the agreement before its scheduled end date, according to court papers. It was supposed to have been recognized over the term of the agreement, per generally accepted accounting principles.
Instead, the two allegedly "conspired" from November 2000 to Jan. 21, 2002, to have the retailer improperly recognize the entire amount in the second quarter ended Aug. 1, 2001, according to the indictments and the SEC civil action. That action enabled Kmart to meet earnings expectations for the quarter.
As a result, Kmart overstated its operating results by $42 million in the quarterly report filed with the SEC and understated its losses by 6 cents a share. Kmart has since restated earnings for the last three years.