Too Many Perks At Kmart?

Creditors of Kmart have filed a civil suit accusing six former Kmart executives of charging the company for nannies, luxury cars and private chauffeurs even as the discount retailer fought a losing battle against bankruptcy.

The 116-page lawsuit filed Tuesday by the Kmart Creditor Trust alleges that former chief executive and chairman Chuck Conaway, former president Mark Schwartz and the four others cost Kmart more than $1 billion in personal and business expenses through poor management.

The lawsuit claims the defendants "engaged in a pattern of corporate waste at a time when, to say the least, Kmart could ill afford it."

The lawsuit says Conaway billed Kmart $106,191 for improvements to his private home, including $34,948 for a guardhouse and $3,590 for a "safe room". He had two company-issued Jaguars, plus a Lincoln Navigator and a driver to take his children to school.

The lawsuit, filed in Oakland County Circuit Court, also alleges the executives concealed Kmart's deteriorating condition from the board of directors.

"Conaway repeatedly indicated that Kmart was on the rebound and that success was just around the corner. In fact, the opposite was true," the lawsuit says. "Even as Kmart was collapsing, Conaway, Schwartz, and the remaining individual defendants took numerous opportunities to enrich themselves and their cronies, all at the expense of Kmart."

Schwartz's attorney, Brian Rosner, declined comment Wednesday. Conaway's attorney did not return calls to The Associated Press seeking comment. But Conaway lawyer Scott Lassar told the Detroit Free Press for a story in Thursday's editions that his client "poured his heart and soul into trying to turn around the giant retailer."

"Although he made significant improvements, the magnitude of the effort, the tragic events of September 11th, the downturn in the economy and fierce competition in the retailing industry defeated his efforts," Lassar said.

The lawsuit also accuses Conaway of poor management skills, saying he had never been CEO of any company before he took over at Kmart in May 2000, and that he replaced senior managers "most often with individuals who lacked both relevant experience and business integrity."

Among the missteps cited in the lawsuit was the program Conaway and Schwartz unveiled in 2001 known as "BlueLight Always." In an attempt to compete against No. 1 discount retailer Wal-Mart Stores Inc., the campaign was supposed to drop prices on the most frequently purchased items, including toothpaste and diapers. The program lowered profit margins, and the impact was magnified when prices were reduced on thousands of Kmart's best-selling items.

The program failed in part due to Kmart's poor distribution system.

The lawsuit says Conaway and the other defendants "gambled that they could transform Kmart virtually overnight." The suit says BlueLight Always' problems "should have been clear even before its inception." Conaway and Schwartz also initiated a massive inventory buildup of nearly $1 billion of mostly unnecessary merchandise.

Conaway, Schwartz and the other executives named in the suit also are accused of using Kmart's corporate jets for personal use.

The lawsuit cites an internal Kmart investigation into a chartered jet trip to Las Vegas that Schwartz and another executive arranged for 60 Kmart associates at a cost of $230,000. "Schwartz's bravado about his gambling losses on this corporate sponsored junket is significant evidence of the trip's real purpose," the complaint says.

The creditor trust was set up in April to recoup money for creditors who lost billions when Kmart filed for Chapter 11 bankruptcy protection in January 2002. The bankruptcy filing resulted in the closing of about 600 stores, cost 57,000 Kmart employees their jobs and canceled Kmart's stock.

The trust sued six other former executives in September to recoup millions in loans given to them weeks before Kmart filed for bankruptcy.

Kmart Holding Corp., as the company now is called, "is not involved in either the pursuit of these individuals or in legal action initiated by the creditor trust against other companies," company spokesman Jack Ferry said.

The lawsuit also names PricewaterhouseCoopers, Kmart's accounting firm from 1993 until last month, citing accounting negligence. PricewaterhouseCoopers spokesman Steven Silber declined comment, saying he had not seen the lawsuit.

None of the executives named in the lawsuit has been accused of criminal wrongdoing, but a federal investigation into the company's collapse continues. Federal charges against two other former Kmart executives were dismissed Nov. 7.

By Randi Goldberg Berris