DETROIT — Federal prosecutors here decided not to file criminal charges against former Kmart executives, including former chairman and chief executive officer Charles Conaway and former president Mark Schwartz, for their roles in the company’s 2002 bankruptcy.

Separate civil charges of fraud filed by the Securities and Exchange Commission against Conaway and former Kmart chief financial officer John McDonald are still pending. Conaway and McDonald were charged with allegedly misleading investors in the months leading up to the company’s bankruptcy filing.

The U.S. Attorney’s office in Detroit declined to comment. On Tuesday, the Detroit Free Press first reported that charges against the former Kmart executives were dropped by the Feds.

“As a three-judge panel ruled on a recent arbitration with Kmart’s creditors, Conaway did nothing wrong when he was the ceo and chairman of Kmart. He worked very hard to turn Kmart around and labored in good faith,” Conaway’s attorney, Scott Lassar, said.

This most recent decision is the latest in a series of legal victories for Kmart’s former management team in the wake of the company’s bankruptcy filing. Former executives also were sued in 2003 by creditors of the retailer who filed charges of negligence, gross mismanagement and acceptance of extravagant perks against Conaway and others. A three-person arbitration panel cleared Conaway of those charges in July.

The decision made this week to lift criminal charges against Conaway and Schwartz ends a three-and-a-half-year, multimillion-dollar probe by the Federal Bureau of Investigation and the Justice Department. The initial investigation was prompted by allegations of corporate wrongdoing that led to Kmart’s bankruptcy filing. Anonymous letters claiming to be from people inside the retailer’s accounting department were sent to media outlets and regulators such as the SEC.

Despite collecting dozens of allegations, hundreds of hours of interviews and millions of pages of documents, the probe was unable to find enough evidence of personal fraud by the senior executives to prosecute, according to the Detroit Free Press.

The decision not to prosecute the executives was made at a Sept. 30 meeting of federal prosecutors and FBI officials in Detroit. According to the Detroit Free Press, the FBI could take the investigation to prosecutors in another district, such as the Southern District of New York, which handles a lot of high-profile securities cases.

This story first appeared in the October 12, 2005 issue of WWD. Subscribe Today.

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