- The Washington Times - Wednesday, February 26, 2003

DETROIT, Feb. 26 (UPI) — Two former Kmart Corp. executives were indicted Wednesday on accounting fraud charges and also cited in a civil complaint issued by the Securities and Exchange Commission.

Enio A. Montini Jr. of Rochester Hills, Mich., who was senior vice president and general merchandise manager of the bankrupt discount chain's drug store division, and Joseph A. Hofmeister of Lake Orion, Mich., who was divisional vice president of merchandising within the same division, are accused of accounting fraud involving $42 million.

Both were fired in May 2002. Montini currently is a senior vice president of Rite-Aid Corp.

The indictments came as a two-day bankruptcy court hearing wound down in Chicago before U.S. Bankruptcy Judge Susan Pierson Sonderby on Kmart's disclosure statement, describing events leading up to its Jan. 22, 2002, bankruptcy filing.

Montini and Hofmeister are accused of negotiating a multi-year contract with American Greetings Corp. that produced a $42 million allowance for Kmart for making the greeting card maker its exclusive supplier in 847 of its more than 2,100 stores.

Instead of applying the allowance to the life of the contract, as accounting rules and company policy required, Montini and Hofmeister applied it to the quarter ended Aug. 1, 2001, which enabled Kmart to understate its losses by 6 cents a share.

The two are accused of securities fraud, making false statements to the SEC and conspiracy.

The complaint said the two hatched their scheme in an effort to meet gross margin numbers for the second quarter of 2001 and repeatedly misrepresented the $42 million as a no-strings-attached payment.

American Greetings had insisted the money be refundable on a pro-rated basis if Kmart terminated the agreement early.

The disclosure statement filed in Chicago and approved late Tuesday by Sonderby describes how Kmart will turn itself around in the next five years. The company hopes to emerge from Chapter 11 by April 30.

Court papers filed Tuesday indicated the company had found evidence against former Chief Executive Officer Chuck Conaway, indicating he had deceived the board of directors about the extent of the company's financial problems. The information was expected to be turned over to a new creditors' trust to recoup funds funneled to executives shortly before the bankruptcy filing.

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