Securities & Exchange Commission v. Conaway (695 F. Supp. 2d 534, 2010)

Opinion Granting in Part Plaintiff’s Motion for Remedies (Dkt. # 150) and Denying Its Motion To Strike (Dkt. # 179.)

STEVEN D. PEPE, United States Magistrate Judge.

I. Introduction

On August 23, 2005, the SEC filed a complaint against Conaway and McDonald alleging violations of the Securities Exchange Act of 1934. The SEC alleged that Defendants had made false statements of material facts, or omitted material facts which made their statements misleading in connection with the MD & A section of Kmart’s Form 10-Q(3) filed on November 27, 2001, and during the conference call held that day. A trial was held between May 13 and 29, 2009. On June 1, 2009, a ten person jury found against Defendant Charles Conaway on all claims. (Dkt. # 129). On July 30, 2009, Plaintiff Securities and Exchange Commission (“SEC”) filed a memorandum in support of its request for remedies. (Dkt. # 150). Defendant Conaway filed a response the next day. (Dkt. # 171). An evidentiary hearing was held on September 16 and 17, 2009.

The SEC is seeking disgorgement of a five million dollar retention loan that it contends was forgiven due to the securities fraud misstatements and omissions of Mr. Conaway and Kmart on November 27, 2001, as well as prejudgment interest on the disgorgement which amounts to $2,698,689 through June 30, 2009, and a civil penalty of $5,000,000. In addition, the SEC seeks an injunction against Mr. Con-away regarding any further violations of the securities laws; (2) a permanent bar against his serving as an officer or director of a public company; and (3) a bar prohibiting Conaway from seeking or accepting any payment, reimbursement, or indemnification from any third party for any portion of the penalty.

II. Background Facts

The background facts are adequately stated on many issues in the January 20, 2010, 698 F.Supp.2d 771, Memorandum Opinion on Defendant’s Motion under Rules 50(b) and 59 (Dkt. # 185). Because information concerning Kmart’s January 22, 2002, bankruptcy was kept from the jury, additional facts concerning that and other facts related to the remedies were presented at the September hearing.

A. Mr. Conaway’s Employment Agreement and Retention Loan.

On May 25, 2000, Mr. Conaway signed an employment agreement setting out the procedure and standards for his termination for cause. (Plf. Exh. # 501.) Under that agreement Mr. Conaway could be discharged only for cause which is defined as the commission of a felony or if he engaged in “conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties under this Agreement, resulting, in either case, in material harm to the Company, unless the executive believed in good faith that such act or nonact was in or not opposed to the best interests of the Company.” (Id. at p. 1.) Under the Agreement, he was to receive written notice of actions or omissions for a proposed termination for cause within six months of the alleged wrongdoing. (Id. at p. 11.) He was to be given 10 days to “cure” if possible, and/or to request a hearing before the Board which had to be held with in 15 days of the request. (Id. at p. 12.)

On May 15, 2001, Mr. Conaway signed an amended employment agreement, which set out the terms for certain stock options and a five million dollar retention loan payable February 1, 2006, with a minimum interest rate, which loan was to be forgiven if Mr. Conaway remained employed at Kmart through January 31, 2006. (Plf. Exh. # 501.) In addition to completing the years of service requirement for loan forgiveness, he did not have to repay the loan and any accumulated interest in the case of a “Loan Forgiveness Event.” (Id. at § 2(c), pp. 3-4.) Such an event is defined as a termination of employment that would cause Mr. Conaway’s stock options to vest early. (Ibid.) Under his original employment agreement, if Mr. Conaway was constructively terminated, his stock options “at the time of termination [of employment] shall become fully vested.” (Plf. Exh. # 501, at § 11(d)(ii)(H), p. 13.) The contract further defines “constructive termination” to include the removal of Mr. Conaway from his position as Chairman of the Board or Chief Executive Officer of Kmart. (Id. at § 1(g)(iii) & § 3(a), p. 2-3.)

B. Kmart’s 2002 Bankruptcy

Despite the programs implemented to deal with the liquidity crisis, it became apparent in early January of 2002 that Kmart would need to file for bankruptcy. Because of this, the Board sought to show it was actively engaged and confident in the Company and Charles Conaway was replaced as Board Chairman in January of 2002 by Board Audit Committee Chairman James Adamson, who had been on the Board of Directors since 1997. (Adamson 10/17/07 Deposition, Plf. Remedies Exh. 19, Dkt. 183-21, at TrDep00424-25.) In considering the change in management, the Board had a major discussion and was divided on whether to remove Charles Conaway as CEO as well as Board Chairman. (Id. at TrDep00424 & TrDep00446) Mr. Adamson believed that Mr. Conaway should be fired. (Ibid.) As a compromise on January 15, 2002, the Board voted to replace Conaway as Chairman of the Board with Mr. Adamson, with Mr. Conaway allowed to continue as CEO. (Id. at TrDep00446; Stallkamp 9/16/09, at Tr02970.).

Kmart filed for bankruptcy a week later on January 22, 2002. On March 11, 2002, the Board made the decision to remove Conaway as CEO and replace him with Mr. Adamson who served as CEO until January 2003 and as Board Chairman until May of that year when Kmart emerged from bankruptcy. (Adamson 10/17/07 at Tr-Dep00425 & TrDep00446; Stallkamp 9/16/09, at Tr02971). At the time the Board felt that it was necessary to “make a wholesale change in management, and ... to move on from all of the past management practices.” (Stallkamp 9/16/09, at Tr02971.) On March 11, 2002, and Kmart entered into a Separation Agreement in which it was agreed that Conaway’s discharge was not “for cause” and that his retention loan was forgiven and the note cancelled. (Plf. Exh. # 289, Dkt. 183-18.) On that date, the Board was not yet aware of any negative liquidity projections generated by Mark Moreland for Mr. Conaway and his Executive Leadership Team (ELT) during the third quarter of 2001, nor were they aware of Project SID, the AP systems changes, or the extent of the Project eLMO cover story and its falsity. (Id. at Tr02972-74.) It was around this time that the Board requested its outside counsel, Skadden Arps conduct an investigation into the circumstances surrounding Kmart’s bankruptcy. (Id. at 21).

Like Board member Stallkamp, Mr. Adamson testified that in the fall of 2001, and apparently at the January and March 2002 Board meetings on management changes, he (i.) was not aware of the many Moreland negative liquidity projections (e.g. Plf. Exh. # 9’s $455 million deficit on November 7, 2001, or Plf. Exh. # 10’s $641 million deficit on November 7, Plf. Exh. # 16’s $ 1 billion shortfall on October 24, 2001), (ii.) believed all references by Mr Conaway to seeking better dating or other terms with vendors was done by negotiations and not unilaterally, and (iii.) had no knowledge of either the AP Systems changes or Project SID slow-pay initiatives. (Adamson 10/17/07 at TrDep0042734 & TrDep00439.) While acknowledging that he did not expect the Board to be shown all financial scenarios Kmart’s management ran, he noted the Board should have been apprised of a scenario showing a dramatic difference between the $96 million in the liquidity cushion forecast in the September Board package and Exhibit 16 showing a billion dollar negative liquidity (Plf. Exh. # 16). (Id. at TrDep00456.)

He testified similar to Mr. Stallkamp, that while the Board was informed of Kmart’s efforts to negotiate better payment terms with vendors, he was not informed of any unilateral efforts of Kmart to delay payments under such programs as Project SID (Plf. Exh. # 11) or the AP System Changes (Plf. Exh. #20), nor did he have any reason to believe any other Board members were aware of such activities. (Id. at TrDep00431 & TrDep0043334 & TrDep00438-39.) Also like Stallkamp, he noted that had he been informed of such unilateral efforts, he would have opposed them as not a good idea violating contractual relationship and harming a personal relationships with vendors. (Id. at TrDep00432 & TrDep0044) “[Tjhis would not be a way that you’d want to build long-term relationships with your vendors.” (Id. at TrDep00441.) In addition to risking vendor’s stopping goods shipments, that it was an “irrational act” of management that signaled a “major liquidity problem” for management. (Id. at TrDep00432, TrDep0044 & TrDep00448.) Had he been aware of the slow pay system of Project SID, he would have determined the cause of the liquidity problem and “what would be necessary to increase the cushion or the liquidity outside of doing something like this.” (Id. at TrDep00433.)

Like Mr. Stallkamp, Mr. Adamson first became aware of Project SID when the Skadden internal investigation was presented to the Board in the fall of 2002. (Ibid.) To his knowledge, no one on the Board was aware of it prior to this. (Id. at TrDep00433-34.) Stallkamp had relayed to Adamson Mr. Conaway’s statement that the rumbling from vendors was because of’ a systems problem and it would all be rectified and it would be back to normal.” (Id. at TrDep00443.) Like Stallkamp, Mr. Adamson confirm that “working capital” means “roughly the same thing as liquidity,” and that when Mr Conaway wrote the Board on December 20 that “we are comfortable with our working capital position going into fiscal year 2002” (Plf. Exh. # 123), he was comforted and he had no awareness that Kmart had reinstituted Project SID that same week. (Adamson 10/17/07 at TrDep00445.) Mr. Adamson testified that the first time he because aware of the Schwartz inventory overbuy of roughly $850 million was at a Board meeting in Detroit, possibly in November 2001, and the Board was very upset. (Id. at TrDep00449.) Mr. Adamson also stated that he did not feel he was provided enough information about Kmart’s liquidity in the fall of 2001 for him to fully discharge his duties to the company’s shareholders, “[bjecause the liquidity position that we were shown as a board was dramatically different than what management felt it really was.” (Id. at TrDep00447-48.) He accepted what Mr. Conaway gave the Board and had they been given all of the relevant information, “I believe we could have taken a lot of actions that potentially would have saved Kmart from filing for bankruptcy .... we came very close, even at the last minute, from being able to renegotiate a credit facility so we would not have had to file bankruptcy.” (Id. at TrDep00448.) He noted the importance of working with vendors, banks and employees when facing a cash problem. While skeptical whether after 9/11 Kmart could get any additional funding by sale/leasebacks, he did believe that additional funds would have been available through secured borrowings against inventory and possibly real estate. (Id. at TrDep00434 & TrDep00455-56.)

In November 2002, the internal investigation into the bankruptcy was completed and the results reported to the Board. While defense objected to the admission of this document and it was not admitted, it was at that time that the Board first learned about the negative liquidity forecasts, the existence of Project SID and the extent to which Project eLMO had been used as a “cover story.” (Stallkamp 9/16/09Tr02981-82.) Mr. Stallkamp was disappointed by the report because it revealed that misinformation had been given to the Board which was surprised by the revelations. (Id. at Tr02982 & Tr02984.) In light of the investigation results, during a February 11, 2003, meeting the Board discussed the possibility of recharacterizing Conaway’s termination as “for cause.” (Plf. Exh. # 505; Stallkamp 9/16/09 at Tr02984-87.) During the meeting, counsel for Conaway addressed the Board and opined that the standard of conduct required to meet the definition of a “for cause” termination under Conaway’s employment agreement was a very high one that could not be met under the circumstances presented. The Board ended the meeting with much discussion, but no final decision wanting to have a point of Michigan law checked, although Stallkamp recalled that they did, in fact, decide Conaway’s termination should be “for cause” which decision he supported. (Id. at Tr02987-88.)

On February 24, 2003, the Board met again and unanimously approved the language to be added to the amended disclosure statement included with the Company’s Chapter 11 filing. (Stallkamp 9/16/09, at Tr02990-91 & Tr02997.) The amendment stated in part that the Board

concluded that there is credible and persuasive evidence to support a finding that Mr. Conaway engaged in conduct that should support the commencement of Trust Claims against Mr. Conaway and which may also be subsumed within the contractual definition of “cause” as that term is defined in the termination provisions of Mr. Conaway’s prior employment agreement with the Company.

Plf. Exh. # 506.

Because Kmart was in bankruptcy proceedings, the Board could no longer take action directly against Mr. Conaway, and it was the Kmart Creditors Trust that had the power to act. (Stallkamp 9/16/09, at Tr02991.) The Board reaffirmed its earlier decision not to seek approval of the bankruptcy court to approve the employment-related agreements with Mr. Conaway and the company demanded repayment of the special retention loan to Conaway. (Id. at Tr02992.) The disclosure statement also noted that there was “credible and persuasive evidence” regarding Conaway’s involvement with Project SID, the eLMO cover story, and his failure to disclose the extent of Kmart’s liquidity problems. The Board felt it was necessary to change his termination to a “for cause” basis because they were “misled by information that [Conaway] gave [them].” (Stallkamp 9/16/09, at Tr02992 & Tr02995.) The Board also reaffirmed that the appropriate mechanism for pursuing any claims against Conaway to pay back his retention loan would be through the Kmart Creditors Trust. (Plf. Exh. # 506; Stallkamp 9/16/09, at Tr02994-95).

Mr. Stallkamp testified that had he discovered the facts a year earlier, he would have supported the same movement against Mr. Conaway and the Board would have made Conaway’s discharge “for cause.” (Id. at Tr02995-97.) Mr. Stallkamp acknowledged that Mr. Conaway took actions that he thought they were in the best interest of Kmart, and without identifying the retention loan the Board sought back, Mr. Conaway did not personally profit from the actions he took regarding Kmart’s liquidity in 2001. (Id. Tr0299899.)

Stallkamp testified that if he and the Board had been presented with the information contained in the Skadden report in November of 2001, Mr. Conaway’s termination would have been “for cause.” (Id. at Tr02996). According to Kmart’s public filings, Conaway’s compensation from his 22 months of service from May 30, 2000 to March 11, 2002 amounted to $2,605,556 salary, $8,087,890 in bonuses for 2000, $736,700 in other forms of annual compensation or $11,430,146 of which $238,703 was for 2003, as well as $2,042,200 other compensation in 2001, plus $ 307 life insurance premium, $4,049,708 in severance payment plus the $5 million loan forgiveness in 2002. (Ex. A to Dkt. # 183-18 at 71.) This does not include the additional $12,692,950 in stock options and restricted stock grants for 2000 and 2001 which value was presumably lost in the January 2002 bankruptcy. The SEC is not seeking in disgorgement any of the 2003 salary or the severance payment, but solely the $5 million retention loan plus prejudgment interest on it. Following his termination, Conaway filed a claim against the Kmart trustee in bankruptcy for an additional $19,635,003 which was later settled for a payment of approximately $1 million.

C. The Arbitration Decision

On June 17, 2004, the Kmart Creditors Trust (“the Trust”), as assignee of all of Kmart’s causes of action against its former officials, filed a demand for arbitration against Conaway. The Trust claimed that during the 20 months that Conaway served as CEO and Chairman of the Board at Kmart, he breached his fiduciary duties to the Company by engaging in “numerous and repeated instances of negligence and gross mismanagement, all of which seriously damaged Kmart.” The Trust claimed that Conaway caused Kmart to be damaged in the amount of approximately $1.7 billion, including the $5 million retention loan. An evidentiary hearing was held between May 2 and 24, 2005.

On July 25, 2005, the arbitration panel issued its decision, relying heavily on the business judgment rule in finding that Mr. Conaway could not be held liable on many of the Trust’s claims. (Def. Remedies Exh. 1, Dkt. 173-3,) The panel also found that Conaway was entitled to keep his retention loan because, in part, the Board did not fire him for cause, which would have required repayment of the loan under the employment agreement, but rather he was constructively discharged when removed from his position as Board Chairman in January 2002. Defense counsel notes among the findings of the arbitration panel were:

As a result of our deliberations, we find, in summary, no basis to hold Conaway personally liable for Kmart’s misfortunes. This is not a case of fraud, deliberate mismanagement, or corporate looting. The evidence shows that Conaway acted at all times in good faith and in what he believed to be the best interests of Kmart. He made a determined, albeit unsuccessful, attempt to accomplish what he was hired to do — to stop Kmart’s long decline relative to its major competitors, to turn the company around, and to restore it to its former position as one of the nation’s preeminent retailers.

.... No credible evidence has been presented of stealing corporate funds, of fraud, or even of neglect of duty or gross mismanagement. Some of Conaway’s decisions did not work out well, but on the record before this panel, on all business matters for which the Trust seeks to recover, Conaway’s conduct qualifies for protection under the business judgment rule, which is designed to insulate decisions of corporate officials from claims of liability based on hindsight evaluations of the results of those decisions.

Id. at 9.

Toward the end of the first year, they addressed that promised amendment by entering into a formal amendment to Conaway’s employment agreement on May 15, 2001. Among other things, the amendment granted to Conaway a loan of $5 million payable in approximately five years with interest. The agreement provided, however, that the loan would be forgiven in full by the company if Conaway remained employed through January 31, 2006, or if the Company should give Conaway earlier written notice of non-extension of his contract, or if Conaway should be constructively terminated by the Company. As defined in the employment agreement, “constructive termination” included, inter alia, “a material reduction or material adverse change in [Conaway’sjresponsibilities, duties, authority”. After Kmart filed for Chapter 11 in January 2002, the Board designated Adamson to function as Interim Chairman in place of Conaway. As of March 11, 2002, Kmart and Conaway entered into a separation agreement which recited Conaway’s constructive termination and forgave Conaway’s $5 million retention loan. Had Conaway been terminated “for cause”, he would have been required to repay the loan.

Id. at 20.

The Trust’s suggestion that the May 21, 2001 agreement is void because Conaway had not disclosed the problems of the inventory overbuy, project SID, and the liquidity crunch, borders on the ludicrous because all of those events occurred later in the year, after the amended agreement had been executed. Even if the board might have been able to fire Conaway for cause, it did not do so. Instead, it acknowledged that his position had been constructively terminated and it affirmatively agreed to forgive the loan. Finally, whether the bankruptcy court approved the separation agreement is irrelevant, because Conaway had clearly been subjected to a constructive termination, which by itself, under the original employment agreement, required forgiveness of the loan.

Id. at 21.

In short, the Trust’s attacks on Conaway’s retention loan have failed. Conaway is entitled to keep the loan.

Id. at 22.

III. Legal Issues

A. The Arbitration Decision and Issue Preclusion.

While at the hearing on summary judgment I thought the arbitration panel decision might have some preclusive effect on the remedies stage of this case, it appears upon further consideration and research that would stretch issue preclusion law against a non-party to the arbitration beyond permissible limits. Thus, the SEC, in this enforcement action, is not bound by the determination of the arbitration panel which did not address the question of whether Mr. Conaway violated the securities laws nor other questions to be resolved in these remedies proceedings. This is not like a securities class action case that is subject to arbitration in which the SEC might have the opportunity to intervene and participate. There has been no showing that suggests the SEC could have been involved in the arbitration of the Kmart Creditors Trust’s multiple claims. Even though the disgorgement remedy on Conaway’s five million dollar retention loan the SEC is seeking is similar to one of the multiple claims of the Creditors Trust pursued in the arbitration, the factual question involved is slightly different— whether the securities violations caused Mr. Conaway to benefit from forgiveness of the retention loan versus did Kmart constructively discharge Mr. Conaway on January 15, 2002, thereby triggering a loan forgiveness event, and did Kmart agree on March 11, 2002, that Conaway’s discharge was not “for cause” and that his retention loan should be cancelled. One of the issue to be resolved in this remedy proceeding is whether either the January 15 or March 11, 2002, agreements would have been the same or occurred at all if Mr. Conaway on November 27, 2001, had not violated federal securities laws.

It is the SEC’s position that had there been no securities fraud on November 27, 2001, Kmart’s Board would have learned enough about (i.) the lengthy coverup of Kmart’s liquidity problems, (ii.) the lies to vendors and Board members to mask (iii.) an extraordinary slow pay regime authorized by Mr. Conaway, that the Board would have fired Mr. Conaway for cause. If it is found that but for the November 27 securities violations, the Board would have removed Mr. Conaway from both his Board Chairmanship and CEO position for cause, would there have been a constructive termination on January 15, 2002, when the Board removed him solely as Board Chairman? Had Mr. Conaway been fired for cause would there have been a March 11, 2002, Separation Agreement with Kmart that his discharge was not for cause, and would there have been an agreement by Kmart that the retention loan was forgiven and the note cancelled? Both of these questions depend on the fact and the timing of the Board’s action to remove Mr. Conaway for cause. The historical events of January 15 and March 11, 2002, upon which the Arbitration Panel relied in denying the claims of the Creditors Trust might well not have occurred had Mr. Conaway not violated securities laws on November 27, 2001, keeping investors and his Board in the dark about a number of important facts that might well have altered the course of events had they been known earlier.

To hold that an arbitration proceeding, in which the SEC was not party, acts as an issue precluding bar to the SEC’s seeking disgorgement of the proceeds of the retention loan as a remedy for a securities violation, would be similar to saying that had the Kmart Creditors Trust entered into a settlement with Mr. Conaway ratifying the Board’s action of forgiving his loan and agreeing he had not violated any securities law and had always acted in good faith and in Kmart’s best interest, the SEC would be checkmated and could make no further move to enforce the securities laws. Both propositions are unsupported in law and would be against sound public policy.

The various exceptions to the basic rule is that a nonparty is not bound by a prior litigation or arbitration are set out in the federal practice treatise of Professors Wright, Miller and Cooper. The Supreme Court in Taylor v. Sturgell, 553 U.S. 880, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008), identifies six exceptions to the rule against nonparty preclusion. A review of the standards from these two sources suggests that on the facts of this case the SEC should not face issue preclusion on any factual or legal findings of the Arbitration panel. The Taylor opinion seems to close the door on any expansion of “virtual representation” beyond the six exceptions for adequate representation it recognized. The Court notes that this more restricted approach to “virtual representation” had been the position of the Sixth Circuit in Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 193 F.3d 415 (6th Cir.1999). Taylor v. Sturgell, 128 S.Ct. at 2173.

The three cases cited by defense counsel on the question of issue preclusion against a non-party are not persuasive. Matter of L & S Indus., Inc., 989 F.2d 929 (7th Cir.1993), denied finding virtual representation because

an identity of claims is not equivalent to an identity of interests. And privity here turns on an identification of interests. Only non-party interests adequately represented in a prior proceeding can be subject to res judicata.

Matter of L & S Indus., Inc., 989 F.2d at 934.

After the Trustee prevailed in a bankruptcy adversarial proceeding against the principal, the Seventh Circuit in L & S Industries found no virtual representation of the guarantor’s interests by the principal in that bankruptcy proceeding because the guarantor’s interests were different from those of the principal, even though there were some overlapping factual and legal claims.

Bates v. Township of Van Buren, 459 F.3d 731, 734 (6th Cir.2006), a 2-1 opinion, applies Michigan law and again notes that privity requires an identity of interests and not just some overlapping similar factual and legal claims. Bates cites Phinisee v. Rogers, 229 Mich.App. 547, 582 N.W.2d 852, 854-55 (1998), in which the court held that an illegitimate child’s paternity claim was not barred by res judicata due to her mother’s failed paternity suit because the mother and daughter did not share a substantial identity of interests. A child interests include possible Social Security benefits, inheritance rights and not just immediate support payments as was the mother’s interest. Bates also seems to acknowledges that Michigan’s “privity” or virtual representation law may be more lenient on accepting virtual representation than the federal law in the Sixth Circuit. Bates, 459 F.3d at 737. Bates cites an earlier opinion in Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 F.3d 1054, 1060 (6th Cir.1995), that reversed a lower court’s liberal application of virtual representation. The Sixth Circuit noted that “[t]he question of virtual representation is one of fact and is to be kept within ‘strict confines.’... Virtual representation demands the existence of an express or implied legal relationship in which parties to the first suit are accountable to non-parties who file a subsequent suit raising identical issues.”

Defense also cite Central Transport, Inc. v. Four Phase Sys., Inc., 936 F.2d 256, 259 (6th Cir.1991), for the unquestioned proposition that arbitration decisions also have preclusive effect. But Central Transport applied preclusion against a party in the earlier arbitration, thus it is of limited assistance here where the issue preclusion is being urged against a non-party to the earlier arbitration.

B. Legal Standards Regarding the SEC’s Remedies Claims

1. Burden of Proof

In an SEC enforcement action, the SEC need prove the elements of its case only “by a preponderance of the evidence, and may use direct or circumstantial evidence to do so.” SEC v. Ginsburg, 362 F.3d 1292, 1298 (11th Cir.2004); SEC v. First Fin. Group of Texas, 645 F.2d 429, 434 (5th Cir.1981); SEC v. Moran, 922 F.Supp. 867, 888 (S.D.N.Y.1996). This standard applies to remedies as well as liability. Steadman v. SEC, 450 U.S. 91, 103, 101 S.Ct. 999, 67 L.Ed.2d 69 (1981) (upholding preponderance-of-the-evidence standard in an SEC administrative proceeding).

2. Permanent Injunction Against Future Violations of the Securities Laws

Section 21(d)(1) of the Exchange Act (15 U.S.C. § 78u(d)(1)) authorizes the Court, upon a “proper showing,” “to enjoin” any “acts or practices constituting a violation of any provision under this title [or] the rules or regulations thereunder.” As the Sixth Circuit noted in SEC v. Youmans, 729 F.2d 413, 415 (6th Cir.1984), “injunctions based upon the securities laws are primarily intended to protect the investing public from future misconduct.” Because the basis “is statutory rather than equitable, the standards of the public interest not the requirements of private litigation measure the propriety and need for injunctive relief.” Id. “[P]roof of irreparable harm and inadequacy of legal remedies need not be shown.” Id.

The test for whether an injunction should be issued is “whether the SEC [has] shown a reasonable and substantial likelihood that [the defendant], if not enjoined, would violate the securities laws in the future.” Youmans, 729 F.2d at 415. The Sixth Circuit considers seven factors in determining whether injunctive relief is appropriate: “(1) the egregiousness of the violations, (2) the isolated or repeated nature of the violations, (3) the degree of scienter involved, (4) the sincerity of the defendant’s assurances, if any, against future violations, (5) the defendant’s recognition of the wrongful nature of his conduct, (6) the likelihood that the defendant’s occupation will present opportunities (or lack thereof) for future violations, and (7) the defendant’s age and health.” Id. No single factor by itself is determinative. Id.

3. Public Company Officer and Director Bar

Section 21(d)(2) of the Exchange Act (15 U.S.C. § 78u(d)(2)) authorizes the Court to prohibit a defendant from serving as an officer or director of a publicly held company. The statute provides:

[T]he court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 10(b) of this title ... from acting as an officer or director of any issuer ... if the person’s conduct demonstrates unfitness to serve as an officer or director of any such issuer.

15 U.S.C. § 78u(d)(2).

In assessing unfitness to serve as an officer or director, courts typically consider: (1) the egregiousness of the violations; (2) the likelihood that the misconduct will recur; (3) the defendant’s role or position when he engaged in the fraud; (4) the degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the defendant’s repeat offender status. See SEC v. Patel, 61 F.3d 137, 141 (2d Cir.1995). Moreover, courts should weigh the “loss of livelihood and the stigma attached to the permanent exclusion from the corporate suite” against the likelihood of future misconduct. Id. at 142.

4. Disgorgement

Congress has expressly recognized the Commission’s right to disgorgement of ill-gotten gains. “Once the equity jurisdiction of a Court has been invoked on a showing of a securities violation, the Court possesses the necessary power to fashion an appropriate remedy. Thus, the Commission may request that the Court order certain equitable relief, such as the disgorgement (giving up) of illegal profits.” H.R. Rep. 98-355, at 7 (1983) reprinted in 1984 U.S.C.C.A.N. 2274, 2280.

“Disgorgement is an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating securities laws.” SEC v. Hughes Capital, 124 F.3d 449, 455 (3d Cir.1997), quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C.Cir.1989). “The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable.” SEC v. Manor Nursing Centers., Inc., 458 F.2d 1082, 1104 (2d Cir.1972). See also SEC v. Lipson, 278 F.3d 656 (7th Cir.2002); Rowe v. Maremont Corp., 850 F.2d 1226, 1241 (7th Cir.1988); SEC v. Randy, 38 F.Supp.2d 657, 673-74 (N.D.Ill.1999). Court may add prejudgment interest to the disgorgement amount to avoid a defendant benefitting for the use of his ill-gotten gains interest free. SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir.1978) (disgorgement is “the amount with interest by which the defendant profited from his wrongdoing”). Most courts use the interest rate applied by the Internal Revenue Service for unpaid balances. SEC v. Randy, 38 F.Supp.2d at 674.; SEC v. Bocchino, 2002 WL 31528472, at *3 (S.D.N.Y. Nov. 8, 2002) (“the district court generally calculates prejudgment interest by using the Internal Revenue Service rates for underpayment of taxes under 17 C.F.R. § 201.600(b)”).

Calculation of the defendant’s economic gain need not be exact, and determination of the appropriate amount is left to the sound discretion of the trial court. “The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged.... The amount of disgorgement ordered ‘need only be a reasonable approximation of profits causally connected to the violation.’ . . .” SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1474-75 (2d Cir.1996), quoting SEC v. Patel, 61 F.3d at 139 (2d Cir.1995).

5. Prejudgment Interest

A decision to award prejudgment interest, and at what rate, like the decision to grant disgorgement, is in the broad discretion of the district court. First Jersey Secs., Inc., 101 F.3d at 1476. Like disgorgement, an award of prejudgment interest is intended to prevent the defendant from profiting from his or her illegal conduct. SEC v. Sargent, 329 F.3d 34, 40 (1st Cir.2003). In other words, it prevents the defendant from receiving “what amounts to an interest free loan procured as a result of illegal activity.” SEC v. Moran, 944 F.Supp. 286, 295 (S.D.N.Y.1996). In deciding whether to award prejudgment interest, the court considers the following factors: (1) the need to fully compensate the wronged party for actual damages suffered; (2) the relative fairness of an award; (3) the remedial purpose of the statute involved; and (4) other general principles deemed relevant by the court. Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 613 (2d Cir.1994). In an enforcement action brought by the Commission, “the remedial purpose of the statute takes on special importance.” First Jersey Secs., Inc., 101 F.3d at 1476. S.E.C. v. Marker 427 F.Supp.2d 583 (M.D.N.C.,2006).

6. Civil Money Penalty

Congress incorporated penalties into the securities laws when it enacted the Securities Law Enforcement Remedies Act of 1990 (the “Remedies Act”). The Remedies Act is now codified at Section 21(d)(3)(A) of the Exchange Act (15 U.S.C. § 78u(d)(3)(A)). In enacting the Remedies Act, Congress explained its purpose in careful and succinct terms. Congress gave the Commission authority to seek civil penalties in part because it considered the existing remedy of disgorgement to be insufficient. “Since disgorgement merely requires the return of wrongfully obtained profits, it does not impose any meaningful economic cost on the law violator. The Committee, therefore, concluded that authority to seek or impose substantial money penalties, in addition to the disgorgement of profits, is necessary for the deterrence of securities law violations that otherwise would provide great financial returns to the violator.” S. Rep. 101-337 (1990) reprinted in 1990 WL 263550 (Leg. Hist.).

The Remedies Act provides for three penalty tiers. In the absence of fraud, a first tier penalty applies. 15 U.S.C. § 78u(d)(3)(B)(i). A second tier penalty applies where the violation involved “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” 15 U.S.C. § 78u(d)(3)(B)(ii). A third tier penalty applies where the violation involved “fraud, deceit, manipulation ...” and “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.” 15 U.S.C. § 78u(d)(3)(B)(iii).

IV. Analysis

A. Findings of Fact

While Courts relax somewhat the standard for a precise measure of any profits obtained as a result of a securities violation, the SEC has the burden of proof by a preponderance of the evidence as to the existence of the defendant obtaining some pecuniary benefit as a result of the securities violation. In the -present case where the SEC is seeking disgorgement of Mr. Conaway’s May 2001, $5 million retention loan, there is no problem with precision as to the amount of the alleged benefit, the dispute lies solely over whether the forgiveness of this $5 million retention loan was a result of the securities fraud by Mr. Conaway. For purposes of this remedies consideration, this Court is bound by the jury’s specific findings that Mr. Conaway was primarily liability for violating Section 10(b) of the Exchange Act and Rule 10b-5 based on: (i.) a misstatement in the MD & A of the 10-Q(3); (ii.) three omissions in the 10—Q(3); as well as (iii.) two statements he made at the November 27, 2001, conference call. In addition he aided and abetted Kmart in its violation of Section 10(b) of the Exchange Act and Rule 10b-5 through the same three wrongful acts on November 27, 2001, and he aided and abetted Kmart in its violation of Section 13(b) of the Exchange Act and Rules 12b-20 and 13a-13 in the misstatement in the MD & A of the 10 — Q(3) and its three omissions. As noted in the Memorandum Opinion on Defendant’s Motion under Rules 50(b) and 59 (Dkt. # 185), whether there was sufficient evidence that Mr. Conaway committed these violations and whether he acted with adequate scienter are fact questions critically dependent on Mr. Conaway’s credibility. While the jury was asked a great number of specific questions in the Verdict Form concerning their findings, there are many factual questions on which they did not make specific findings. Thus, additional findings of fact consistent with the jury’s findings are necessary and appropriate in this remedies stage of the proceedings.

Based on the evidence presented at trial and at the September 16 and 17, 2009, hearing I make the following findings of fact. In order to assist the Sixth Circuit in understanding the evidence upon which these findings of fact are based I make substantial references to exhibits and testimony upon which I have relied. While at times my narrative notes “I find” or “I find more credible,” these stylistic statements are not meant to limit my findings of fact to statements with such predicates because all of what follows I find to be the facts of this case.

The securities violations in this case that are supported by substantial evidence involve one misrepresentation and three omissions in the MD & A of the November 27, 2001, 10-Q(3) and two fraudulent statements in the Conference Call with analysts and others of that date. Those two statements were misleading because they furthered a coverup of the three material omissions that the jury found in the MD & A. I find that the conference call statements that the jury found to be misleading were conscious efforts of Mr. Conaway to blame the “noise” or discontent from Kmart’s vendors as being due to two problems — a terming logic glitch in the conversion to a new computer system, Project eLMO, which delayed vendor payments that had to be cleared and paid by “hand”, and the second source of vendor discontent was the 25% of Kmart’s vendors it was discontinuing. The first of these explanations for vendor discontent was a false statement and the second, while having an element of truth, was used in a materially deceptive fashion by Mr. Conaway along with the Project eLMO lie to camouflage and quiet rumors “circling in the marketplace,” to use Mr. Conaway’s phrase, as to the true reason the bulk of Kmart’s vendors were upset. The truth that was being concealed was that these vendors were intentionally being stretched on payment because of an exceptionally difficult liquidity problem Kmart was experiencing in the third quarter of 2001.

Mr. Conaway’s August 17, 2001, letter to the Board estimated Kmart’s liquidity cushion in early November’s peak borrowing period would increase “from $200 to nearly $600 million.” (Plf. Exh. # 110.) The August 17 liquidity forecast that went to the Board showed a $544 million liquidity cushion. (Plf. Exh. # 6, p. 2 & 4.) Mr. Conaway by this time was aware of the Schwartz overbuy that he characterized as “totally unacceptable” and “Reckless.” (Plf. Exh. # 188, p. 3.) Assistant Treasurer Mark Moreland prepared an August 15, 2001, scenario forecast for Mr. McDonald, at a time when he thought the Schwartz overbuy was only $ 400 million, that showed a negative $135 million liquidity projected for a November 9 peak borrowing date. Mr. Moreland prepared an August 31 liquidity forecast for Mr. McDonald and the Executive Leadership Team (which included Mr. Conaway) showing negative liquidity on October 10 considering the $850 million overbuy and projected positive comparable sales of 8% from the prior year for September, October and November. (Plf. Exh. # 7.) Mr. Moreland prepared another forecast for the ELT assuming no improvement in sales from the prior year, and it revealed company needing “about $455 million of incremental borrowing capacity” to avoid illiquidity. (Plf. Exh. # 9; Moreland 6/27/07, at TrDep00058.) If sales were down 3% from the prior year, then the November 7 deficit would reach $641.8 million. (Plf. Exh. #10.) With a $600 million reduction in future receipts of inventory and zero comp sales, a forecast Moreland prepared for the ELT shortly after September 5 showed a liquidity deficit of $597 million on October 24. (Plf. Exh. # 12; Moreland 6/27/07, at TrDep00062.) Negative 3% comparable sales forecast a deficit exceeding one billion dollars on that date. (Plf. Exh. # 16.) The actual sales for Kmart in the third quarter were down 2.2% overall, down 1.5% for comparable stores, from the prior year.

While Defendant testified that the AP System changes were not a temporary response to the Schwartz overbuy and were commenced in July or early August (Conaway 5/27/09 at Tr02084-85), I find more credible the testimony of Messrs. Gilbert, Archambeau and Moreland that, unlike extended dating or the working capital initiative to negotiate better vendor payment terms that were begun before the Schwartz overbuy, the AP System changes were undertaken in August and September and, like Project SID, they were in response to the Schwartz overbuy in order to maintain Kmart’s liquidity, and they were intended to be temporary.

Given the substantial number of ELT meetings in August and September dealing with the liquidity problem caused by the Schwartz overbuy and the negative liquidity scenarios Moreland was preparing for the ELT, it is inconceivable that CEO Conaway was not aware of the AP System changes and that they proved inadequate to deal with the liquidity problem.

In the week of September 3, 2001, Mr. Conaway met with Moreland and McDonald and approved the “confidential” “Project SID Process Overview” (Plf. Ex. # 11; Moreland 6/27/07, at TrDep0002324; McDonald 4/23/09, at Tr02426-28; Conaway 5/27/09, at Tr02426-29.) Conaway was very supportive of Project SID because the “hung up in processing” mechanism of stretching vendors would not be obvious to the vendors. (Moreland 6/27/07, at TrDep00025-26.) Mr. Conaway asked that it be put into place as quickly as possible and McDonald and Conaway made it clear it was to be disclosed only a “very limited” number of people. (Id. at TrDep00026 & TrDep00028.) While press rumors and Kmart employee suspicions may have caused the secrecy of these intentional slow pay schemes to begin to unravel by late October and early November, it was the intent of Mr. Conaway to keep it a secret to avoid increasing the risks vendors would not ship product, and Mr. Conaway lied to the jury when he indicated otherwise.

The amount of money held back for vendor payments under the AP System changes, which continued through the end of the year, was approximately $300 million. The amount of funds held back from vendor payments under Project SID are accurately stated within a plus or minus 10% margin of error in Moreland’s Project SID Master Tracking Document. (Plf. Exh. # 289A.) The $300 million held back under the AP System changes continued throughout the fall of 2001 and into January 2002. This approximate $300 million withheld under the AP System changes was in addition to the amounts held back under Project SID.

The September 11, 2001, terrorist attack required the September 18 Board meeting to be held by telephone. (Plf. Exh. # 66.) While the September 2001 Board Package (Plf. Exh. # 65, p. 19) shows a $96 million liquidity cushion forecast, down $449 million from the August 10 forecast of a $544 million liquidity cushion on Kmart’s peak borrowing date, the Board was not informed that this liquidity forecast was dependent on funds being held back under the AP System changes and Project SID. Without this information being provided to the Board, this $96 million liquidity cushion forecast was misleading and it suggests that this liquidity cushion was computed after all of the bills were “accounted for” or paid, as Board member Stallkamp understood it. (Stallkamp 5/18/09, at Tr00745.) While Mr. Conaway likely discussed extended dating and the working capital initiative to negotiate better vendor payment terms at the September Board meeting, Mr. Conaway in the Board Package and what was discussed at that meeting did not make clear to the Board either the unauthorized Schwartz overbuy or the slow pay schemes of the AP System Changes and Project SID. While the September Board package did show $825 million inventory over “Commitment” (i.e. Plan), there is no convincing evidence that the significance of this for Kmart’s liquidity was made clear to the Board nor that the inventory build up was not simply an effort to improve in-stock position for Mr. Conaway’s new BlueLight Always sales initiative.

By the September 18, 2001, Board meeting, Mr. Conaway and his ELT members should have realized that in the aftermath of the September 11 attacks, zero comp sales or worse were probable for the quarter. Assuming zero comp sales and a $600 million reduction in future receipts of inventory, Moreland’s projections prepared for the ELT revealed a liquidity deficit of over half a billion dollars in mid-October, 2001. (Plf. Exh. # 12.) Indeed it was such dire projections that led McDonald and Conaway to initiate the AP System changes and Project SID. In this time frame the weekly meetings of the ELT spend at least 15 or 20 minutes talking about Kmart’s liquidity. (Boyer 7/19/07, at TrDep00379.) The likely negative liquidity scenario Kmart was facing could have been revealed to the Board of Directors in confidence. Such data was information essential for them to exercise their oversight function and to assist Kmart’s top management in how best to deal with this liquidity problem. While it might have taken additional time and cooperation from Kmart’s vendor community and lenders, Kmart in September, October and November of 2001 likely could have obtain substantial additional secured borrowings against its $8 billion in inventory, and possibly against its $1 billion in real estate. Defense Expert Avram Tucker noted Kmart’s existing credit agreements allowed them to ask for an additional $500 million and Kmart could have accelerated the $3 billion secured credit facility they were working on for the next year. Even Mr. Conaway acknowledged “We had billions and billions of borrowing capacity of which Jeff led and agreed with, to execute on.” (Conaway 5/27/2009, at Tr02186.) In addition to cutting future inventory receipts to help manage the liquidity problem, CFO Jeff Boyer’s preferred method of remedying the liquidity problem was to increase the credit revolver by additional borrowings secured by inventory, which is a “fairly easy thing to do” and “can be done pretty expeditiously.” (Boyer 7/19/07, at TrDep00383-85 & TrDep00394.) Mr. Conaway opposed that but did consider possibly getting a secured credit facility in 2002. (Id. at TrDep00385 & TrDep00394.)

In his October 12, 2001, letter to the Board, Mr. Conaway noted September sales were flat from the prior year adding that “the economic effect of the [9/11/] tragedy will likely continue through the Christmas season____” (Plf. Exh. # 71.) Mr. Conaway’s letter notes that Kmart ended September with $1.1 billion more merchandise than the prior year related largely to “efforts to improve in-stock and support the BlueLight Always launch” but also identifying an effort to reduce inventory by the end of the third quarter. (Plf. Exh. #71, p. 2.) The Board package for the October 23 telephonic meeting, again showed inventory up $1.1 billion from the prior year and projected comp sales down a half a percent for the quarter. (Plf. Exh. # 114, at pp. 13 & 17.) Yet, an October 4 document prepared for the ELT by a working group consisting of Messrs. McDonald and Kearse, Jellinek and Moreland (who were deselecting invoices for payment and managing the cash crisis and thus were those most informed at Kmart about managing the liquidity crisis) had a far more gloomy projection of a negative 3% comparable sales until Thanksgiving and cumulative negative cash flow into December. (Plf. Exh. # 18, at p. 2; Plf. Exh. # 20, at p. 2; Moreland 6/27/07, at TrDep00072-73.) This information was not shared with the Board of Directors. Rather the October Board package showed the liquidity cushion was improved at $158 million. (Plf. Exh. 114, at p. 27.) Again, this figure showing residual borrowing capacity from the banks was misleading because the Board was not informed that it was built on additional “borrowings” from Kmart’s vendors through delayed payments that on October 23 were approximately $682 million under Project SID and an additional $300 million under the AP System changes. (Plf. Exhs. # 289A and # 20.) Again, at the October meeting the Board was not informed of either of these two slow pay schemes nor that much of the increase in inventory was the Schwartz overbuy involving merchandise received earlier than plan and without Conaway’s authorization. Any discussion of managing payables at the October meeting, like the September meeting, left the Board with the impression that such activities were being undertaken through negotiations, and not unilaterally.

Two days after the October 23rd Board meeting the New York Times published an extensive article noting Kmart vendor payments being stopped in September without explanation and questioned if Kmart was seeking “to squeeze vendors.” (Def. Exh. 22A, at p. 2.) Two days later CFO Boyer sent his “I’m very worried” email to Mr. Conaway noting the growing difficulty in managing “the mounting payment issue with vendors” and “the ‘noise level’ coming from our vendor community and their factors is increasing.” (Plf. Exh. # 76.) He warned Mr. Conaway that increased purchases forecast for November would prevent Kmart from being “able to work down our nearly $800 million in past due invoices.”

Kmart, with the knowledge and approval of Mr. Conaway on November 2, 2001, responded to the press rumors and vendor “noise level” with the “AP System Issues Talking Points” (hereinafter “Talking Points”) blaming the delays in payments to vendors as being caused solely by terming logic problems in Project eLMO. (Plf. Exh. # 35.) While Project eLMO did generate an extraneous purchase order of $109 million, which error was likely caught before delivery of the goods, it would not have affected vendor payments. (Archambeau 5/13/09, at Tr00507; Gilbert 5/13/09, at Tr00428.) I find no documentary or any convincing evidence that Project eLMO caused even one vendor payment to be delayed.

While denying at trial that he helped christen Talking Points at a November 2 meeting to which Mr. McDonald was summonsed, in a 2005 deposition Mr., Conaway acknowledged that he approved “a course of conduct” of vendors being provided “the explanation that the reason for the slow payments was a computer mistake.” (Conaway 2/10/ 2005, at TrDep00314.) I find this earlier admission more credible than his testimony at trial. I find that Mr. Conaway on November 2 approved of Kmart’s using Project eLMO in Talking Points as the sole excuse for vendor complaints over late payments. I find that he knew on November 2 that Project eLMO was not a significant or legitimate explanation for why vendor payments were being delayed, because Mr. Conaway knew that the cause of delays in vendor payments vendor was the intentional slow pay caused by Project SID and the AP System changes. I find that Mr. Conaway’s testimony at trial that he talked with Mr. Stallkamp at his early November breakfast meeting about “stretching vendors” and “prioritizing invoices” is not true. (Conaway 5/27/09, at Tr02145-46.) I find more convincing Mr. Stallkamp’s testimony that denied being told by Mr. Conaway about this unilateral program to stretch vendors at the November breakfast meeting. I find that the sole reason Mr. Conaway gave Mr. Stallkamp about the rumors of delays in vendor payments was an unintentional eLMO “IT system glitch” that would be fixed. (Stallkamp 5/18/09, at Tr0080203.) I find that Mr. Conaway knowingly lied to Mr. Stallkamp at that November breakfast meeting.

A second major article in the November 8, 2001, New York Times questioned “Kmart’s ability to pay off the money it owes,” to which Mr. Conaway responded “Kmart is not short of cash.” (Def. Exh. 23A, at p. 4.) That same day CFO Boyer had a 60-90 minute one on one meeting with Mr. Conaway in which Mr. Boyer went through each of the 27 page PowerPoint presentation. For reasons noted in the January 20 opinion, I find Mr. Boyer’s testimony more credible than that of Mr. Conaway concerning that meeting. I find that the meeting ended calmly with Mr. Conaway at least leading Mr. Boyer to believe he had approved contacting Jay Henderson, an independent PriceWaterhouseCooper (“PWC”) partner in Chicago, to provide a quality review on Kmart’s accounting methods for vendor allowances. (Boyer 7/19/07, at TrDep00395 & at TrDep00411, Plf. Exh. # 97.) While Mr. Boyer raised again the allowances issue (Plf. Exh. # 97, at p. 20, JNB 000025), to the annoyance of Mr. Conaway who thought that issues had been resolved, Mr. Boyer’s concern was not an “[ijrrational” attack on Mr. Murphy’s integrity as Mr. Conaway characterized it, but a “good faith” — albeit possibly a bit scrupulous— concern that the PWC earlier review of the allowances issue, apparently under Mr. Murphy’s direction, was his evaluating his own work and not necessarily a neutral evaluation. While CFO Boyer did raise that Kmart “[m]ay need to plan for bankruptcy filing” (Plf. Exh. #97, at p. 18, JNB 000023), this was not presented as merely a “strategic bankruptcy” as Mr. Conaway characterized what Boyer said (Conaway, 5/27/09, at Tr02176-85), but was a realistic concern given Kmart’s difficult liquidity position that ended in bankruptcy eleven weeks later.

Mr. Conaway testified that he and Boyer never got beyond the Jim Adamson talking points which would have been the first 8 pages of the 27 page presentation. (Conaway, 5/28/09, at Tr02510-13.) After raising the allowances issue, the independence of Kmart’s PWC accountant and the “strategic bankruptcy,” Mr. Conaway testified that he realized he had to let Boyer go. (Conaway 5/27/09, at Tr02186.) Several reasons lead me to believe that Mr. Conaway was not telling the truth when he said they never got beyond the Adamson talking points in the first 8 pages when Boyer expressed his concerns over Joe Murphy’s independence, Kmart’s allowances and bankruptcy. First, for reasons noted here and in the January 20 opinion, I find it more likely than not that Plaintiffs Exhibit 97 was Mr. Conaway’s copy of the Boyer November 8, 2001, presentation and this exhibit had Mr. Conaway’s markings on multiple pages after page 8. The three issues that Mr. Conaway testified caused him on November 8 to determine that Mr. Boyer had to be fired were Boyer’s revisiting of the allowances issue, questioning the integrity and independence of Kmart’s lead PWC auditor, Joseph Murphy, and suggesting “we should do a strategic bankruptcy to fix our capital structure.” (Conaway at 5/27/2009 Tr02183-85.) Mr. Boyer acknowledged he might have discussed a “strategic bankruptcy” “some months earlier” but Boyer’s November 8 document notes only “May need to plan for bankruptcy filing.” (Boyer 7/19/07, at TrDep00414; Plf. Exh. 97. at JNB 000023.) I find Mr. Boyer’s testimony credible that he and Mr. Conaway went through his presentation “page by page” because Boyer went to the extra effort of preparing a PowerPoint presentation to “make sure we covered all the points” in the meeting and “didn’t forget any.” (Boyer 7/19/07, at TrDep00395 & TrDep00408.) The possibility of a plan for bankruptcy is not in the first 8 pages, but on page 18. (Plf. Exh. # 97. at JNB 000023.) Similarly the allowances issue is not found in the first 8 pages, but in the last 8 pages, which pages have what are Conaway’s doodlings and later the handwritten name “Jay Henderson” whom Boyer had worked with at PWC and whom he recommended to do the allowances issue review. (Plf. Exh. # 97. at JNB 000025-31.) Thus, while acknowledging that he and Boyer discussed possible bankruptcy and the allowances issues, Mr. Conaway denies reviewing the pages of Mr. Boyer’s PowerPoint presentation that covered those two issues.

Mr. Conaway specifically denied reviewing the page on “Implications/Next Steps” (Conaway, 5/28/09, at Tr02512-13.) That page warns that Kmart would not meet its financing covenants to the banks, its cash flow was “close to $500 million negative,” leading to “Credibility” issues with the “Board, Rating Agencies, Banks and [Wall] Street.” (Plf. Exh. # 97, at p. 18, JNB 000023.) This page then recommended need to develop financial contingency plans including a fundamental restructuring of financing, a possible need to plan for bankruptcy, and the need to “[d]iscuss issues with the Board at the November Board Meeting.” In his direct testimony at trial Mr. Conaway testified that on November 8, 2001, he and Boyer discussed possible bankruptcy. (Conaway, 5/27/09, at Tr02185-86) Yet, the next day, when confronted with Plaintiffs Exhibit # 97 and the question “Now, do you see the bottom where it says ‘May need to plan for bankruptcy filing’ .... You don’t recall discussing that with him at this meeting?,” Mr. Conaway adamantly asserted: “We did not discuss it. We didn’t go through anything past the Jim Adam-son talking points and the three points that we talked about.” (Conaway, 5/28/09, at Tr02512.) Yet, the three points he referred to from his testimony the day before included bankruptcy. Directing Mr. Conaway’s attention to the sentence on that page: “Discuss issues with the Board at the November Board meeting,” he was asked if that included the “the concerns that he [Boyer] had expressed in his October 27 [“I’m very worried”] e-mail and other concern.” Mr. Conaway responded.

Well, I would assume that Jeff would want to talk to — again, we didn’t go through this p