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U.S. Securities and Exchange Commission

Securities and Exchange Commission

Litigation Release No. 18000 / February 26, 2003

SEC Charges Two Former Kmart Executives
With $42 Million Accounting Fraud

Securities and Exchange Commission v. Enio A. Montini, Jr. and Joseph A. Hofmeister, Civil Action No. 03-70808 (Borman, J.; Capel, M.J.) (E.D. Michigan, filed February 26, 2003)

The Securities and Exchange Commission ("SEC") today filed a civil action against two former officers of Kmart, Enio A. Montini, Jr. and Joseph A. Hofmeister. Montini and Hofmeister were also indicted today by the United States Attorney's Office for the Eastern District of Michigan on related criminal charges.

The SEC's civil complaint, filed in the United States District Court for the Eastern District of Michigan, alleges that:

  • Enio A. Montini, Jr. was Senior Vice President and General Merchandise Manager of Kmart's Drug Store Division. Joseph A. Hofmeister was Divisional Vice President of Merchandising within the Drug Store Division.
  • Montini and Hofmeister negotiated a multi-year contract with one of Kmart's vendors, American Greetings Corporation, pursuant to which American Greetings paid Kmart an "allowance" of $42,350,000 on June 20, 2001. Generally accepted accounting principles, as well as the company's own accounting policies and practices, required that the $42 million be recognized over the term of the agreement.
  • Montini and Hofmeister lied to Kmart accounting personnel and concealed a side letter relating to the $42 million payment from American Greetings in order to improperly recognize the entire amount in the quarter ended August 1, 2001. Those deceptions caused Kmart to understate losses by $0.06 per share.

The SEC charges Montini and Hofmeister with violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, the reporting and bookkeeping provisions of Rules 13b2-1 and 13b2-2 of the Exchange Act, and the reporting, bookkeeping, and internal control provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder. The SEC seeks as relief permanent injunctions, disgorgement of ill-gotten gains (including a $750,000 forgivable cash loan Montini received from the company) with prejudgment interest, civil money penalties, and officer and director bars.

The SEC's investigation is continuing.

SEC Complaint in this matter



Modified: 02/26/2003