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Two former Kmart (KMRTQ) officials were indicted on Wednesday on federal fraud charges.


Securities and Exchange Commission

filed a civil complaint in the U.S. District Court for the Eastern District of Michigan against Enio Montini Jr., formerly the general merchandise manager of Kmart's drug stores, and Joseph A. Hofmeister, the company's former division vice president of the merchandise division. The complaint alleges that Montini and Hofmeister misled Kmart account officials about a $42 million payment that led the company to understate a quarterly loss by 6 cents per share.

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The U.S. attorney's office also filed criminal charges on Wednesday against Hofmeister and Montini related to the alleged accounting fraud.

The civil and criminal charges relate to a $42 million payment made by American Greetings to Kmart in June 2001 as part of a multiyear contract between the two companies, according to a statement from the SEC.

Instead of recognizing the $42 million payment over the lifetime of the contract, per generally accepted accounting principles, Kmart recorded it on its quarterly report of August 2001, the SEC said. Montini and Hofmeister concealed documents that led Kmart to improperly record the payment, the SEC said.

The SEC is seeking an injunction against the two defendants that would bar them from serving as officers or directors of public companies in the future as well as an unspecified amount in fines. The agency is also seeking to force Montini to repay a $750,000 loan that he received from Kmart.

Under the criminal charges, Montini and Hofmeister could face up to 10 years in federal prison.