2 Ex-Officials At Kmart Face Fraud Charges (Published 2003) (2024)

Two former Kmart executives were indicted yesterday by a Detroit grand jury on federal charges of fraud, conspiracy and making false statements over their recording of a $42 million payment that resulted in an overstatement of Kmart's results.

The executives, who ran Kmart's drugstore division until they were dismissed from the company nine months ago, had been trying to spruce up their division's performance in a particular quarter, according to investigators.

The two men, Enio A. Montini Jr. and Joseph A. Hofmeister, were also charged with fraud by the Securities and Exchange Commission in a related complaint. They are the first people to be indicted as a result of investigations into Kmart's former management that began after an anonymous letter detailing internal problems was sent to the Kmart board and government officials last January, around the time Kmart sought Chapter 11 bankruptcy protection. The investigations are continuing.

The complaints filed yesterday offer a glimpse into the byzantine world of retail accounting, describing how one eight-figure payment, intended to cover a five-year period, was used to improve the quarterly results at Kmart's drugstore division.

The payment was made as a kind of advance by American Greetings to Kmart on the anticipated sale of greeting cards. At American Greetings, the payment would be offset by actual sales of cards over the term of the contract, a spokesman, David Poplar, said.

''It's a classic case of matching expenses with revenue,'' Mr. Poplar said.

But at Kmart, the entire $42 million was recorded in a single quarter, which improved the company's results per share for that period by 6 cents. Under generally accepted accounting principles, as well as S.E.C. rules, the payment, known as a vendor allowance, should have been recorded over the entire term of the contract, the S.E.C. complaint states. The quarter ended in August 2001, five months before Kmart filed for bankruptcy.