Court rules that former Kmart CEO is liable for misleading investors

Well, this decision could set an interesting precedent. A jury in Michigan found the former head of Kmart, Charles Conaway, liable for misleading investors about company finances before a bankruptcy protection filing in 2002. The verdict was reached in a civil fraud trial, following 10 days of testimony in federal court.

The trial focused on a conference call with analysts and Kmart's quarterly report to regulators, both of which took place in November, 2001. The Securities and Exchange Commission (SEC) accused Conaway of withholding pertinent details from the analysts that had been highlighted in the management-analysis section of the report filed with the agency. On his call with the Wall Street analysts, Conaway did note that Kmart's sales were poor, leading to a 15 percent drop for the stock; however, he did not address any vendor strategy, or what has been deemed an "ill-timed purchase" of merchandise worth $800 million. In his defense (which obviously didn't go over too well with the jury), he testified that he had not written, or even read, the report and had relied on his CFO and others for its findings.


Now that the guilty verdict has been handed down, U.S. Magistrate Judge Steven Pepe will handle the penalty phase. Conaway could be banned from ever serving as an executive at a public company -- which would be a great loss for the corporate world (said with tongue in cheek, of course).

I noted that this could be an interesting precedent -- and it very well could be. Imagine if the managers of GM or Chrysler could be held accountable for the current state of their companies. You mean that executives could actually be held responsible for their actions? Could we apply this retroactively to the banks that got us into the credit crisis?

I'm not sure which is worse -- that Conaway truly misled investors or was so completely asleep at the switch that he didn't know what was in his own company's SEC filings. I think maybe the latter, and the thing is it's actually believable. I think there are lots of executives who regularly leave such "details" to their CFO and other underlings. Of course, it's interesting that one of the punishments under consideration is to prevent Conaway from being an executive anywhere else. Do we really need to tell other companies to stay away form this guy? Sadly, yes. I'm guessing that there is some company out there that would have hired him for one reason or another, and they would have bragged about how good a job he did in the past.

The court's decision highlights the weaknesses of executives and the companies that hire them. It is well past time to get rid of the good old boys' network and bring some fresh blood into the C-suite. Now we'll see whether it actually happens.

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