SEC Charges Former Kmart, Vendor Execs with Accounting Fraud

U.S. SECURITIES AND EXCHANGE COMMISSIONLitigation Release No. 18989 / December 2, 2004Securities and Exchange Commission v. John Paul Orr, Michael J. Frank, Albert M. Abbood, Darrell Edquist, David C. Kirkpatrick, David N. Bixler, Thomas L. Taylor and Randall M. Stone, 04 Civ. 74702 (Roberts, J.) (E.D. Michigan, filed December 2, 2004)The Securities and Exchange Commission today filed civil fraud charges against three former Kmart executives and several current and former employees of Eastman Kodak Company, Coca Cola Enterprises Inc. and PepsiCo Inc.'s wholly-owned subsidiaries, Pepsi-Cola Company and Frito-Lay, Inc. The SEC's Complaint (attached at right), which was filed in the United States District Court for the Eastern District of Michigan, alleges that these individuals caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor "allowances." Kmart obtained allowances from its vendors for various promotional and marketing activities. According to the Complaint, defendants caused Kmart to recognize allowances prematurely on the basis of false information provided to the company's accounting department. A number of vendor representatives participated in the fraud by co-signing false and misleading accounting documents, executing side agreements, and, in some instances, providing false or misleading third party confirmations to Kmart's independent auditor, PricewaterhouseCoopers LLP. As a result, Kmart's net income for the fourth quarter and fiscal year ended January 31, 2001, was overstated by approximately $24 million or 10 percent, as originally reported. The company restated its financial statements after filing for bankruptcy to correct these and other accounting errors.The Kmart defendants are John Paul Orr, former Divisional Vice President of Kmart's photo division; Michael K. Frank, former Divisional Vice President and General Merchandise Manager of Kmart's food and consumables division; and Albert M. Abbood, former Divisional Vice President of non-perishable products in Kmart's food and consumables division. Without admitting or denying the allegations of the Complaint, Frank and Abbood consented to final judgments permanently enjoining them from violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. Frank consented to a five year officer and director bar, and Abbood agreed to pay a $50,000 civil penalty. The proposed final judgment against Frank does not impose a civil penalty based upon his demonstrated inability to pay.The vendor defendants are Darrell Edquist, a former Vice President and General Manager of Eastman Kodak Company; David C. Kirkpatrick, a former National Sales Director for Coca Cola Enterprises, Inc.; David N. Bixler, a former National Sales Director of PepsiCo's Pepsi-Cola division and current Vice President and General Manager of PepsiCo; Randall M. Stone, a former National Account Manager for PepsiCo's Frito-Lay division; and Thomas L. Taylor, a former Director of Sales for PepsiCo's Frito-Lay division. Without admitting or denying the allegations of the Complaint, Edquist consented to a final judgment permanently enjoining him from violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder and directing that he pay a $55,000 civil penalty. Without admitting or denying the allegations of the Complaint, Stone consented to a final judgment permanently enjoining him from violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder and directing that he pay a $30,000 civil penalty. Without admitting or denying the charges against him, Taylor consented to an administrative order to cease and desist from committing or causing violations of Section 13(a) of the Exchange Act and Rules 13a-1, 12b-20 and 13b2-1 thereunder and a final judgment directing that he pay a $25,000 civil penalty.The SEC's Kmart investigation is continuing.

SEC Charges Former Kmart, Vendor Execs with Accounting Fraud

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