Thomas C. Newkirk
John L. Hunter
Cheryl Scarboro
Reid A. Muoio
Kelly McCormick

Attorneys for Plaintiff
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0706
(tel) 202/942-7205 (Muoio)
(fax) 202/942-9639 (Muoio)

UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF MICHIGAN

Plaintiff Securities and Exchange Commission (the "SEC") alleges as follows:

NATURE OF THE ACT

1. The SEC brings this accounting fraud action against two former officers of Kmart Corporation, Enio A. Montini, Jr. and Joseph A. Hofmeister. During the quarter ended August 1, 2001 ("Q2"), Montini and Hofmeister lied to Kmart accounting personnel and concealed a side letter relating to a $42 million payment from American Greetings Corporation. Those deceptions caused Kmart to overstate earnings by $0.06 per share and enabled the company to meet analysts' expectations for the quarter.
    
2. By engaging in such conduct, Montini and Hofmeister (i) directly or indirectly violated, and aided and abetted violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; (ii) directly or indirectly violated the reporting and bookkeeping provisions of Rules 13b2-1 and 13b2-2 of the Exchange Act [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2]; (iii) aided and abetted violations of the reporting, bookkeeping, and internal control provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 13a-13 and 12b-20 thereunder [17 C.F.R. §§ 240.12b-20 and 13a-13] ; and (iv) demonstrated their substantial unfitness to serve as officers or directors of a publicly-traded company pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].
    
3. Kmart fired Montini and Hofmeister and restated its financial statements for Q2 in Spring 2002. Earnings per share were reduced $0.06 as a result of the restatement of the American Greetings transaction.

JURISDICTION

4. This Court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce and/or of the mails in connection with the transactions described in this Complaint.

DEFENDANTS

5. Defendant Enio A. Montini, Jr. ("Montini") was Senior Vice President and General Merchandise Manager of Kmart's Drug Store Division at all relevant times through May 10, 2002, when he was terminated. Montini is currently Senior Vice President at Rite Aid Corporation. He lives in Rochester Hills, Michigan.
    
6. Defendant Joseph A. Hofmeister ("Hofmeister") was Divisional Vice President of Merchandising within the Drug Store Division at all relevant times through May 10, 2002, when he was terminated. He lives in Lake Orion, Michigan.
    
7. On May 22, 2002, the SEC subpoenaed Montini and Hofmeister for testimony in the investigation that preceded the filing of this Complaint. On September 26, 2002, Montini and Hofmeister asserted their Fifth Amendment rights against self-incrimination in lieu of providing testimony.

RELEVANT ENTITY

8. Kmart Corporation ("Kmart" or the "company") is a Michigan Corporation headquartered in Troy, Michigan. On January 22, 2002, Kmart filed a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy code. The company's common stock is registered with the Commission pursuant to 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and traded on the New York Stock Exchange until December 19, 2002, when it was delisted. Kmart's fiscal year ends the last Wednesday in January.
    
9. Before filing for bankruptcy, Kmart operated approximately 2,100 stores throughout the United States and employed approximately 250,000 workers. Kmart's annual sales were approximately $37 billion, and the company was the nation's second largest discount retailer and third largest general merchandise retailer.

DEFENDANTS' ACCOUNTING FRAUD

I. APPLICABLE ACCOUNTING PRINCIPLES

10. Kmart represented in its Form 10-Q for the quarter ended August 1, 2001 ("Q2") that the financial statements contained therein were prepared in accordance with the rules and regulations of the SEC and, in the opinion of management, reflected all adjustments necessary for a fair statement of the results for the interim periods.
     
11. The rules and regulations of the SEC provide that financial statements that are not prepared in accordance with generally accepted accounting principles ("GAAP") are presumptively misleading or inaccurate [Regulation S-X, 17 CFR § 210.4-01(a)(1)]. GAAP, as well as the rules and regulations of the SEC [17 CFR § 210.10-01(a)(5)], require the disclosure of material contingencies in quarterly financial statements.
     
12. Kmart's largest vendors paid Kmart up-front monies or "allowances" for, among other things, exclusive rights to sell product in Kmart stores. Kmart classified these vendor allowances as a reduction in cost of goods sold in its statement of operations. GAAP, as well as Kmart's own accounting policies and practices, generally required that refundable up-front vendor monies be recognized over the life of the contract.
     
13. Those accounting rules were communicated to Kmart's merchants, including Montini and Hofmeister, in a number of ways, including a memorandum dated July 25, 2001 entitled, "Guidelines for 2001 Allowances." Those written guidelines provided in relevant part that, "Allowances may only be recorded in the period for which they are earned . . . To the extent that a multi-period agreement with a brand partner has provisions for early termination and the prorata return of any allowance (or similar) payment, then initial recognition of the allowance must be spread over the term of the agreement" (emphasis original).

II. The American Greetings Transaction

14. For years Kmart's greeting card business had been split between Hallmark Cards, Inc. ("Hallmark") and American Greetings Corporation ("American Greetings") pursuant to written agreements executed in January 1997. As of calendar year 2000, Hallmark supplied approximately 847 Kmart stores and American Greetings supplied approximately 1,250. In mid-2000, Kmart considered giving its greeting cards business to a single vendor and solicited bids from its two suppliers.
     
15. American Greetings submitted the winning proposal and entered into a letter of intent with Kmart on or about February 14, 2001. The parties agreed in principle to negotiate a contract giving American Greetings exclusive rights to all Kmart stores for five years. Among other things, American Greetings agreed to pay Kmart $50,000 for each store Hallmark would be exiting.
     
16. On or about June 4, 2001, American Greetings took over the Hallmark stores, and on June 20, 2001, American Greetings paid Kmart an allowance of $42,350,000 (847 stores at $50,000 apiece). Under the terms of its 1997 contract with Hallmark, Kmart was obligated to repay a portion of certain prepaid allowances and other costs, and accordingly Kmart paid Hallmark $27,298,210 on or about June 4, 2001.
     
17. The final agreement with American Greetings was executed on January 21, 2002 - the day before Kmart filed for bankruptcy. Under the terms of that multi-year agreement, the $42 million allowance, together with other up-front monies paid by American Greetings, was covered by a repayment provision.
     
18. GAAP, as well as the company's own accounting policies and practices, required that the $42 million be recognized over the term of the agreement. Instead, Kmart improperly recognized the entire $42 million allowance during the quarter ended August 1, 2001, $27 million as an "offset" to the payment to Hallmark and $15 million in "incremental" merchandise allowances.
     
19. GAAP, as well as the rules and regulations of the SEC, required disclosure of a liquidated damages provision then covering the $42 million allowance. There was no disclosure of that material contingency in Kmart's Form 10-Q for the quarter ended August 1, 2001.
     
20. The acts and omissions of Montini and Hofmeister described below caused these accounting and disclosure errors.

III. THE AMERICAN GREETINGS SIDE-AGREEMENT

A. Montini And Hofmeister Were Under Pressure Offset Gross Margin Shortfalls With Allowances

21. Montini was General Merchandise Manager ("GMM") of Kmart's Drug Store division, and Hofmeister was a Divisional Vice President ("DVP") of Merchandising.
     
22. Drug Store was one of five merchandising divisions within Kmart and handled such products as cosmetics, perfumes, batteries, stationery and greeting cards. The merchants in the division were responsible for purchasing these goods on favorable terms from Kmart's vendors. The merchants were also responsible for negotiating vendor allowances.
     
23. Every year the merchant group helped develop a budget against which their performance was measured. One of the primary measures of performance was contribution to gross margin. Because vendor allowances were generally accounted for as a reduction of cost of goods sold, they could help merchants make their gross margin numbers.
     
24. Drug Store division struggled to meet its gross margin numbers in Q2. These margin shortfalls put pressure on Montini and Hofmeister to come up with additional allowances.
     
25. Even after "offsetting" the $27 million payment to Hallmark, Drug Store was projecting a substantial gross margin shortfall for Q2. With approximately two weeks left to go in the quarter, Drug Store developed an "action plan" to close the gap that included a $15 million adjustment relating to the "American Greetings Contract."

B. Montini And Hofmeister Knew That American Greetings Intended the $42 Million Allowance To Be Covered by Liquidated Damages

26. Montini and Hofmeister negotiated the American Greetings transaction on behalf of Kmart.
     
27. Throughout the negotiations, American Greetings insisted that any and all up front monies be covered by a payback provision. There were two reasons for this. First, American Greetings worried that, given Kmart's shaky financial condition, the retailer might not survive the contract term. Second, American Greetings needed a payback provision in order to capitalize and amortize advance payments, and thereby spread these costs over the life of the contract.
     
28. American Greetings told Montini and Hofmeister repeatedly that it intended up-front monies, including the $42 million, to be covered by a payback provision. American Greetings explained to Montini and Hofmeister that payback was necessary to enable American Greetings to capitalize and amortize up-front payments.
     
29. American Greetings internal projections consistently capitalized and amortized up-front payments including the $42 million on a straight-line basis over the term of the agreement. Likewise, Kmart internal projections, which were prepared for Montini and Hofmeister, spread the $42 million evenly over the contract term. The assumption underlying both sets of projections was that the $42 million would be refundable.

C. Montini Repeatedly Misrepresented that the $42 Million Came With "No Strings Attached"

30. Montini and Hofmeister conducted their negotiations with American Greetings in secret, excluding from the process key finance and accounting personnel. One of the people frozen out of the negotiations was the DVP of Finance for the Drug Store division ("Finance DVP"). The Finance DVP, an accountant, was supposed to have functioned as Montini's chief financial officer.
     
31. On at least three occasions detailed below, Montini lied to his Finance DVP about the American Greetings transaction, telling her falsely that the $42 million came with "no strings attached." Montini told his Finance DVP's immediate supervisors the same thing in at least one meeting and one or more hallway conversations.

(i) Montini's First Lie

32. Because Montini and Hofmeister had excluded them from the negotiations, Kmart's accounting personnel did not know how to account for the $42 million check from American Greetings when it arrived on or about June 20, 2001. Drug Store's Finance DVP met with Montini in his office shortly thereafter, looking for answers.
     
33. Montini explained to his Finance DVP that the $42 million represented an allowance for American Greetings to take over the 847 stores that were formerly supplied by Hallmark at the rate of $50,000 per store. Montini further explained that the first $27 million of the $42 million was to "offset" Kmart's check to Hallmark to terminate the agreement. Montini then asked whether he could recognize the $15 million balance in the current quarter.
     
34. The Finance DVP told Montini that, if there were any "future encumbrances" tied to the $42 million, then it could not be recognized immediately. Montini asked what she meant by "future encumbrances." His Finance DVP explained that she meant there could be no volume commitments and no merchandising privileges extended over a period of time. For example, if American Greetings was given exclusive rights for five years, the $42 million would have to be amortized over the life of the contract.
     
35. Montini assured his Finance DVP that there were "no strings attached" to the $42 million.
     
36. Montini omitted to tell his Finance DVP that, although not yet reduced to writing, American Greetings was insisting that the $42 million be refundable.

(ii) The $27 Million "Offset"

37. Despite this conversation with Montini, the Finance DVP was not sure how to account for these two checks because she had been frozen out of the negotiations. The Finance DVP decided for the time being to "offset" the $27 million against the $42 million, thereby avoiding any impact on the income statement. Thus, the two pieces would be held in the same account pending further review.
     
38. This offsetting would not have occurred had Montini not lied. Had they known the truth, Kmart accounting personnel would have expensed the $27 million in Q2.

(iii) Montini's Second Lie

39. In early July 2001, the Finance DVP consulted with Kmart's Audit Services Department ("Internal Audit") and was told that, for there to be immediate recognition of any part of the $42 million, there could be no future obligations on the part of Kmart.
40. Shortly thereafter, the Finance DVP again met with Montini and told him that Internal Audit had confirmed that, for there to be any recognition in the current period, there could be "no strings attached" over a period of time or in terms of volumes.
     
41. Montini again lied to his Finance DVP, telling her that there were "no strings attached" to the $42 million and concealing the fact that American Greetings insisted that the $42 million be refundable.
     
42. Despite these assurances, the Finance DVP asked to see a copy of the draft agreement.

(iv) Montini's Third Lie

43. On or about July 17, 2001, the Finance DVP found a draft agreement on her chair that clearly subjected the $42 million to a repayment provision.
     
44. The Finance DVP immediately confronted Montini, who lied a third time, claiming falsely that the draft contract did not embody his agreement with American Greetings that there would be "no strings attached" to the $42 million.
     
45. Montini then called Hofmeister into his office and berated him for allegedly messing up the contract language. This was a charade.

(v) $15 Million In "Incremental" Allowances

46. On or about July 18, 2001, American Greetings signed a letter explaining that the $42 million represented an allowance for exclusive merchandising privileges in 847 stores at $50,000 per store effective June 4, 2001, and faxed it to Hofmeister.
     
47. On the basis of this letter and Montini's lies, in late July 2001, the Finance DVP instructed Kmart accounting personnel to book $15 million in "incremental" allowances, thereby recognizing the balance of the $42 million from American Greetings (after "offsetting" the $27 million payment to Hallmark).
     
48. These incremental allowances would not have been recognized in Q2 had Montini not lied. Had they known the truth, Kmart accounting personnel would have spread the entire $42 million over the life of the contract.

D. Montini And Hofmeister Concealed A Side-Letter Subjecting The $42 Million To A Liquidated Damages Provision

49. Kmart's second quarter ended August 1 ("Q2"), and the company closed its books for the quarter on August 6, 2001. During the closing process, Internal Audit demanded additional evidence that the $42 million allowance was not subject to any repayment obligation.
     
50. Montini and Hofmeister responded by providing Internal Audit a letter agreement with American Greetings that appeared to excluded the $42 million from any repayment obligations, while secretly executing and concealing a side-letter subjecting it to a liquidated damages provision.

(i) The "No Strings Attached" Letter

51. On or about August 1, 2001, Internal Audit informed Montini's Finance DVP that it was not comfortable with the American Greetings transaction because American Greetings' July 18 letter was insufficiently clear. Internal Audit again reminded the Finance DVP that, if the $42 million was repayable, Kmart could not record the transaction in Q2.
     
52. Together Internal Audit and the Finance DVP revised the July 18 letter for American Greetings' signature, adding a second paragraph that read: "This allowance relates only to the cost of entry and does not imply future obligations for volumes or for length of time associated with the exclusive merchandising privileges. Repayment of this amount [$42,350,000] is not required under any c[i]rcumstances."
     
53. On August 2, 2001, the Finance DVP told Montini and Hofmeister that Internal Audit wanted American Greetings to sign the revised July 18 letter. Montini again pretended to be upset at Hofmeister for messing up the contract.
     
54. At approximately 2:00 p.m. that afternoon, American Greetings faxed to Hofmeister a proposed letter agreement that, using different language, appeared to exclude the $42,350,000 from any repayment obligation (the "'No Strings Attached' Letter").
     
55. Later that afternoon, the Finance DVP found a copy of the unsigned "No Strings Attached" Letter on her chair. At approximately 5:30 p.m. that afternoon, she provided a copy of that document to Internal Audit, her supervisor and Montini.

(ii) The "Liquidated Damages" Letter

56. Unbeknownst to the Finance DVP, her immediate supervisor and Internal Audit, American Greetings faxed a second proposed letter agreement to Hofmeister on August 3, 2001. That unsigned letter obligated Kmart to pay American Greetings for early termination of the agreement in accordance with the following liquidated damages schedule (the "Liquidated Damages" Letter):
     
    

    [Termination] Year	Liquidated Damages
    June 3, 2001 - June 2, 2002	$42,350,000
    June 3, 2002 - June 2, 2003	$33,880,000
    June 3, 2003 - June 2, 2004	$25,410,000
    June 3, 2004 - June 2, 2005	$16,940,000
    June 3, 2005 - June 2, 2006	$ 8,470,000

    
     
57. Neither Montini nor Hofmeister provided a copy of the unsigned "Liquidated Damages" Letter to the Finance DVP or Internal Audit.

(iii) Montini And Hofmeister Execute Both Letter Agreements

58. Montini signed both the "No Strings Attached" Letter and the "Liquidated Damages" Letter on or about Monday, August 6, 2001. At 2:40 p.m. that afternoon of August 6, 2001, Hofmeister faxed both documents to American Greetings. American Greetings co-signed the two letter agreements that same day.
59. At approximately 4:00 p.m. that afternoon, American Greetings faxed both the "No Strings Attached" Letter and the "Liquidated Damages" Letter to Hofmeister. That evening American Greetings also signed clean originals of both letters and sent these to Montini by overnight mail. Montini co-signed those originals as well.

(iv) Montini And Hofmeister Concealed the "Liquidated Damages" Letter

60. Montini and Hofmeister provided a copy of the signed "No Strings Attached" letter, but not the "Liquidated Damages" Letter, to the Finance DVP and Internal Audit. They concealed this "side letter" because they knew that, had Kmart's accounting personnel known the truth, they would not have allowed the $42 million allowance to be recognized in Q2.
     
61. On the basis of that misinformation, Internal Audit did not object to the accounting for the American Greetings transaction.
     
62. Internal Audit discussed the American Greetings transaction with Kmart's independent auditor, PricewaterhouseCoopers LLP ("PwC"). Internal Audit also provided PwC with a copy of the "No Strings Attached" Letter.
     
63. On the basis of that misinformation, PwC did not object to the accounting for the American Greetings transaction during their quarterly review.

IV. THE PREMATURE RECOGNITION OF THE $42 MILLION CAUSED KMART'S Q2 LOSSES TO BE FRAUDULENTLY UNDERSTATED BY $0.06 PER SHARE

64. On August 23 Kmart filed its Form 10-Q for the quarter ended August 1, 2001 and issued a related press release.
     
65. According to the financial statements incorporated into both the Form 10-Q and press release, the company reported a net loss of $0.19 per share for the quarter, $0.04 per share excluding special charges. The latter met Wall Street analysts' expectations to the penny.
     
66. The premature recognition of the $42 million allowance from American Greetings, however, caused Kmart's Q2 losses to be fraudulently understated by $0.06 per share.

V. MONTINI'S $750,000 RETENTION LOAN

67. Montini received a $750,000 forgivable cash loan on or about December 3, 2001, as part of the company's so-called "Special Retention Program."
     
68. When Kmart's Board of Directors approved the Special Retention Program in Fall 2001, it did not know of Montini's misconduct relating to the American Greetings transaction.
     
69. Had the Board of Directors known these facts, it is highly unlikely that Montini would have received the $750,000.
     
70. Kmart terminated Montini and Hofmeister on or about May 10, 2002.

FIRST CLAIM FOR RELIEF

(Violations of Section 10(b) and
Rule 10b-5 of the Exchange Act)

71. Plaintiff SEC hereby incorporates ¶¶ 1 through 70 with the same force and effect as if set out here.
     
72. Montini repeatedly lied to Kmart accounting personnel and then executed and concealed a side letter relating to the American Greetings transaction. Hofmeister helped execute and conceal the American Greetings side letter.
     
73. Montini and Hofmeister knew, or were reckless in not knowing, that their acts and omissions caused the premature recognition of the $42 million allowance from American Greetings during the quarter ended August 1, 2001. Montini and Hofmeister knew that recognition was premature not only because Kmart's allowance guidelines clearly prohibited it, but also because Montini had been told that there could be "no strings attached."
     
74. Kmart's Form 10-Q for the quarter ended August 1, 2001 was false and misleading because the financial statements contained therein (i) overstated earnings by $0.06 per share, (ii) were not prepared in compliance with the rules and regulations of the SEC, GAAP, or the company's own accounting policies and practices, (iii) did not reflect, in the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods, and (iv) failed to disclose the liquidated damages provision then covering the $42 million allowance from American Greetings.
     
75. Those accounting and disclosure violations were material because there is a substantial likelihood that a reasonable investor would have considered them important, especially in light of the fact that they (i) caused earnings for the quarter to be overstated by 32 percent, (ii) masked a failure by the company to meet analysts' expectations, and (iii) involved misconduct by two high-ranking officers of the company.
     
76. In the manner described in ¶¶ 1 through 75, defendants Montini and Hofmeister, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons, in violation of Section 10(b) of the Exchange Act [15 U.S.C § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
     
77. Montini and Hofmeister are likely to continue to violate these antifraud provisions of the Exchange Act unless enjoined.

SECOND CLAIM FOR RELIEF

(Aiding and Abetting Violations
of Section 10(b) and Rule 10b-5
of the Exchange Act)

78. Plaintiff SEC hereby incorporates ¶¶ 1 through 77 with the same force and effect as if set out here.
     
79. Kmart violated Section 10(b) [15 U.S.C § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder by filing with the Commission a Form 10-Q containing materially false and misleading financial statements and by issuing a related earnings release for the quarter ended August 1, 2001 ("Q2").
     
80. In the manner described in ¶¶ 1 through 79, defendants Montini and Hofmeister, aided and abetted Kmart's violations of Section 10(b) [15 U.S.C § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder, pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)], by knowingly providing substantial assistance thereto.
     
81. Montini and Hofmeister are likely to continue to aid and abet violations of these antifraud provisions of the Exchange Act unless enjoined.

THIRD CLAIM FOR RELIEF

(Violations of the Reporting Provisions
of the Exchange Act)

82. Plaintiff SEC hereby incorporates ¶¶ 1 through 81 with the same force and effect as if set out here.
     
83. In the manner described in ¶¶ 1 through 82, defendants Montini and Hofmeister violated Rule 13b2-2 of the Exchange Act [17 C.F.R. § 240.13b2-2] by, directly or indirectly, lying to Kmart accounting personnel in connection with the preparation and filing of Kmart's Form 10-Q for the quarter ended August 1, 2001.
     
84. Kmart violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-13 promulgated thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13] by filing with the Commission a Form 10-Q containing materially false and misleading financial statements for the quarter ended August 1, 2001.
     
85. In the manner described in ¶¶ 1 through 84, defendants Montini and Hofmeister aided and abetted Kmart's violations of Sections 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-13 promulgated thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13], pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)], by knowingly providing substantial assistance thereto.
     
86. Montini and Hofmeister are likely to continue to violate, and aid and abet violations of, these reporting provisions of the Exchange Act unless enjoined.

FOURTH CLAIM FOR RELIEF

(Violations of the Bookkeeping and
Internal Control Provisions
of the Exchange Act)

87. Plaintiff SEC hereby incorporates ¶¶ 1 through 86 with the same force and effect as if set out here.
     
88. In the manner described in ¶¶ 1 through 87, defendants Montini and Hofmeister violated Rule 13b2-1 of the Exchange Act [17 C.F.R. § 240.13b2-1] by, directly or indirectly, falsifying or causing the falsification of, the books, records or accounts of Kmart.
     
89. Kmart violated Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)] by failing to make and keep accurate books and records and to maintain a system of internal accounting controls sufficient to provide reasonable assurances that its financial statements were prepared in accordance with GAAP, the rules and regulations of the SEC, and the company's own accounting policies and practices.
     
90. In the manner described in ¶¶ 1 through 89, defendants Montini and Hofmeister aided and abetted Kmart's violations of Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)], pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)], by knowingly providing substantial assistance thereto.
     
91. Montini and Hofmeister are likely to continue to violate, and aid and abet violations of, these bookkeeping and internal control provisions of the Exchange Act unless enjoined.

PRAYER FOR RELIEF

WHEREFORE, the SEC respectfully requests that this Court enter a judgment:

Dated: February 26, 2003