Ex-Kmart CEO Settles SEC Fraud Case for $5.5 Million

Charles Conaway, a former chief executive of Kmart Corp., agreed to pay $5.5 million to end a U.S. Securities and Exchange Commission lawsuit accusing him of misleading shareholders about the retailer’s prospects prior to its 2002 bankruptcy.

The settlement, outlined in court papers, was reached about eight months after a federal judge in Detroit ordered Conaway to pay $10.2 million in the civil fraud case. A federal jury had found Conaway liable at a June 2009 trial.

Conaway was appealing the $10.2 million judgment and the settlement would end that appeal.

The SEC had accused Conaway of failing to tell investors Kmart had deferred in 2001 at least $570 million of payments owed to suppliers to conserve cash. It also accused Conaway of misrepresenting Kmart’s liquidity problems.

“Mr. Conaway wants to get this behind him and move on with his life,” his lawyer Scott Lassar, a partner at Sidley Austin LLP in Chicago, said in an email.

SEC spokesman Kevin Callahan said the $5.5 million would be payable immediately and that the settlement holds Conaway “accountable for his misconduct.”

Kmart filed for bankruptcy protection in January 2002. It emerged the following year and later acquired rival Sears Roebuck & Co. The combined company is now known as Sears Holdings Corp.

In imposing the $10.2 million penalty, U.S. Magistrate Steven Pepe said Conaway “played a central role” in the securities violations and gave false testimony under oath.

The original judgment required Conaway to pay a $2.5 million fine, return a $5 million loan from Kmart and pay $2.7 million of interest.

The settlement calls for him to pay a $2.5 million fine and return $3 million of the loan, court papers show.

The Detroit federal court must confirm the settlement.

The case is SEC v. Conaway et al, U.S. District Court, Eastern District of Michigan, No. 05-40263.

(Reporting by Jonathan Stempel in New York; editing by Tim Dobbyn and Andre Grenon)