Federal Investigators Probing Kmart's Finances

ByABC News via via logo

Aug. 21, 2002 -- Kmart, an icon of American retail, is drawing a lot of curiosity from budget-conscious people these days, but they're not blue-light special shoppers.

The company is under investigation by the Securities and Exchange Commission, the FBI, and a federal grand jury.

At the center of the inquiries is man who used to be at the helm of Kmart's operations: Charles Conaway, Kmart's former CEO. During his less than two years at the company, he made about $13 million, and lived in a mansion. He also re-negotiated his contract five times, at one point scoring himself a $5 million "retention loan."

As the company was spiraling towards financial ruin, he engineered six- and seven-figure "retention" loans for 24 other top executives. Meanwhile, 22,000 Kmart workers were laid off from their jobs.

Investigators want to know whether most of these executives actually had to pay back these loans, and whether Conaway hid Kmart's financial problems from the company's board of directors and investors.

In January, Kmart filed for bankruptcy. Two months later, Conaway was fired. But now there are questions about the new management, and the way they've been spending company money, while Kmart is mired in bankruptcy.

Executives Flying High

One of the areas being looked at is executive travel. Footage from WXYZ, the ABC station in Detroit, shows Kmart executives flying back and forth to bankruptcy hearings on a private jet earlier this year. The executives told the judge that the company can't pay its bills, yet each of the flights cost $10,000. A ticket on Southwest Airlines would cost less than $200.

Kmart's new CEO, James Adamson, is the person who approved the expenses. But in an interview with the ABCNEWS' Detroit affiliate soon after taking over, Adamson didn't even know about the size of the company's jet fleet. The six jets were worth $40 million.

In his interview with WXYZ, Adamson was asked how the company could afford to operate a corporate jet at the same time it was laying people off.

"I can't justify that," Adamson said. "We don't want to just look at that, we want to look at everything."

Adamson acknowleged six jets might be a lot, but said "it's a $37 billion company with 2,000 stores, [and executives] trying to travel to stores every day." He has since cut Kmart's jet fleet in half.

Adamson, who had been a member of the Kmart board under Conaway, was called out of retirement to save the company, and he received a large sign-on bonus that he acknowledged as being $4.5 million. Adamson told ABCNEWS' Good Morning America that he had no idea the company was in such trouble during his time on the board.

"We knew the company had its issues but didn't know it was in such financial trouble until January," Adamson said.

In its effort to get Adamson to take the helm, Kmart agreed to pay all the taxes on his bonus, $1.5 million a year in salary, $90,000 for legal advice to negotiate his deal and all his living expenses, along with a $10 million line of credit. Besides that, he was slated to receive $4 million if he saves the company, a bonus he has since decided not to take, even if he's able to save Kmart.

"If I can help turn this company around and save 220,000 jobs, that is so critical to me," Adamson said on GMA. "This is a large company. We disappointed customers. We were out of stock — they didn't get the right service. That's what we have to work hard on," he said.

Adamson had previously told WXYZ in Detroit that the salary or the perks he's getting as the new CEO of Kmart do not embarrass him."This is what it took for me to come out of retirement and I'm not defensive," he said.

Sweetening the Deal

For months after coming on board, Adamson made a weekly commute from his New York City home to Detroit on a private jet at a cost of $12,000 a week. If he had purchased a first-class ticket on Northwest Airlines, it would have cost him only $600.

Since then, Adamson says the company has made significant changes. He says it cut back on private jet use, except in instances where it is cost-effective. He also bought a home near corporate headquarters in Detroit, cutting back on his trips to New York.

ABCNEWS' Dan Harris reported this story for Good Morning America.

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