Kmart remains under investigation

Enio Montini and Joseph Hofmeister are accused of manipulating the stricken company's financial statements and lying to its accountants.

The pair's actions led Kmart to overstate its 2001 second-quarter results by $42.3m, according to US financial watchdog The Securities and Exchange Commission (SEC).

The charges - which carry a maximum 10 year prison sentence and a $1m fine - are part of an ongoing investigation into financial irregularities at the US retailer.

'Understating losses'

Mr Montini and Mr Hofmeister are accused of improperly accounting for a contract they negotiated with American Greetings, America's second largest greeting card company.

The pair allegedly put an up-front payment from the company through the books in one quarter, rather than spreading it over the lifetime of the contract as is the normal practice.

The two executives are also accused of lying to Kmart's accountants and concealing a letter relating to the payment.

"These deceptions caused Kmart to understate losses by six cents a share," an SEC spokesman said in a statement.

An American Greetings spokesman said the company co-operated fully with the investigation and would not be affected by the case.

Stalking horse?

The charges are the first to come out of a federal probe into accounting practices at Kmart in the run up to its January 2002 bankruptcy filing.

Some legal commentators said Wednesday's indictments could be just the tip of the iceberg, as investigations into the company continue.

Warren Dennis, a partner at New York law firm Proskauer Rose LLP, told Reuters news agency: "It is most likely what I call stalking-horse indictments, that are intended to pry the tongues of lower-level people ... to get testimony against the higher-ups."

Financial troubles

Mr Hofmeister, a divisional vice-president of merchandising who had worked for Kmart for 30 years, and Mr Montini, who as a senior vice president in Kmart's drugstore division was higher up the chain of command, lost their jobs in May 2002.

At the time, the retailer said the cuts were part of an effort to streamline senior management.

The fraud allegedly took place as concerns about Kmart's financial position began to surface.

Enron

In a separate move, the pair have been indicted by the US Attorney's Office for the Eastern District of Michigan on related criminal charges.

These charges carry a maximum five-year prison term and a $250,000 fine.

The two men's lawyer, Mark Srere, said he did not have an immediate comment but would issue a statement later.

Wednesday's indictments are the latest of more than a dozen high-profile criminal proceedings to be brought against former executives of some of America's biggest companies in the 15 months since the collapse of energy trader Enron.

Employee tip-offs

Top executives from companies such as Adelphia Communications, Qwest, Tyco and WorldCom have been charged with crimes ranging from insider trading to theft.

The case also carries echoes of the accountancy scandal which this week rocked Dutch retailer Ahold.

Kmart launched an internal probe into accounting irregularities last year following anonymous tip-offs from employees.

Last month, the company announced it would close more than 300 stores with up to 35,000 job losses.