Securities & Exchange Commission v. Conaway (698 F. Supp. 2d 771, 2010)

Memorandum Opinion on Defendant’s Motion Under Rules 50(b) and 59 for judgment as a matter of law or, in the ALTERNATIVE, FOR A NEW TRIAL.

STEVEN D. PEPE, United States Magistrate Judge.

“The whole financial system is based on trust and belief that what people say is their word. So, without that, the system decays. ” — Witness Eric Beder, equity analyst, (December 17, 2007, at TrDep00299.)

“If they ask a question, yes. And you determine that you’re not going to disclose the information to them, no, that’s not disclosing. That’s not lying. ” — Defendant Charles C. Conaway, former Kmart CEO, (February 13, 2008, at TrDep00344.)

“Corporate fraud is not usually begun by here’s a bad guy in a company who does bad things .... Usually ... companies ... ultimately have problems with their financials.... [TJhen they hit a bump in the road, and within the company there is this mind-set of ‘well this is a bump in the road and we’ll just paper it over.’ When it proves not to be a bump in the road but a chasm ... it gets wider and wider and wider.... The corporate fraud cases— sometimes they’re less greed than arrogance .... a lot of these people believe that it’s absolutely impossible for them to fail.”

-Kurt Eichenwald, Author of The Informant, A True Story (Broadway Books 2000)

CEO Charles Conaway characterized the August 2001 $850 million overbuy as a “bump in the road. ” (September 25, 2001, Voice Mail Blast to Kmart Employees Plf. Exh. 318, at p. 89:18.) Later he also characterized Project eLMO as a bump in the road, but in truth it was the false cover story he used in the effort to paper over the liquidity crisis caused by the $850 million overbuy. (November 27, 2001, Conference Call 1 Plf. Exh. 57. at p. 25.)

Following a three week trial, a jury of 10 determined that defendant Charles C. Conaway, former CEO of Kmart Corporation, violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, and in addition he aided and abetted Kmart in its violation of Section 10(b) of the Exchange Act and Rule 10b-5, and in Kmart’s violation of Section 13(b) of the Exchange Act and Rules 12b-20 and 13a-13. Defendant has filed a motion under Federal Rules of Civil Procedure 50(b) for judgment as a matter of law or, in the alternative, under Rule 59 for a new trial. Other than the finding of fact on one alleged misstatement for which it is determined there is insufficient evidence, Defendant’s motion is denied and the jury’s verdict is upheld.

While arising in the same 2001 time frame as the securities fraud cases involving Enron and WorldCom, this case involving America’s then third largest discount retailer presents less overt wrongdoings and no stock profiteering. To understand the nature and validity of the Securities Exchange Commission’s claims, a detailed presentation of the facts is required as set forth in Section I. Following the factual summary, this decision will address Mr. Conaway’s legal claims in Section II followed in Section III with an analysis of his claims asserting insufficient evidence to uphold the jury’s findings.

Page

I. Background Facts............................. ..778

A. Kmart’s Liquidity Problem.................. . .778

B. The Cover-Up Story: Project Elmo.......... ..787

C. Communications with the Board .............. ..789

D. Kmart’s Quarterly SEC Filing on Form 10 — Q(3) ..797

E. The Conference Call........................ ..798

II. Defendant Conaway’s Legal Challenges: ...................................802

A. Claim Three — Aiding and Abetting Kmart’s Violation of Section 13(a) of the Exchange Act....................................................802

1. Challenge to the Violation of Section 13(a) of the Exchange Act...........802

2. Challenge to the Instruction on Item 303 of Regulation S-K..............807

3. Jury Instructions...................................................808

a. Background Law...............................................808

b. Regulation S-K, Item 303........................................809

(1.) Did the Jury Instruction Confuse 303(b) with 303(a) and not require a Change?........................................809

(2.) Must all Item 303 Disclosures Affect Future Operations? ........814

(3.) Was the Instruction on Materiality Confusing? .................820

B. Claim Two — Aiding and Abetting Kmart’s Violation of Section 10(b) of the Exchange Act.......................................................821

1. Jury Findings on Claim Two.........................................821

2. Challenge to Use of the MD & A as a Whole as the Statement Underlying Section 10(b) and Rule 10b-5 Liability....................822

3. Challenge to the “implied representation theory of liability.”.............825

4. Challenge to Use of Regulation S-K Item 303 as a Basis of Section 10(b) and Rule 10b-5 Liability......................................834

C. Claim One — Defendant Conaway’s Violation of Section 10(b) of the Exchange Act.......................................................850

III. Defendant Conaway’s Challenges to the Sufficiency of the Evidence.........851

A. Sufficiency of the Evidence Legal Standard ...............................851

B. Credibility Issues Regarding Defendant Conaway..........................851

1. Mr. Conaway’s Involvement in Misleading Financial Representations to the Board.....................................................852

2. Mr. Conaway’s Misleading Statements and Actions at Kmart.............853

a. The Growing Debt, Vendor “Noise” and Talking Points..............853

b. The November 13 Levin Letter...................................854

c. Conaway Statement to the New York Times .......................854

d. Conaway’s November 14 Voice Mail to his Employees.:..............855

e. Conaway’s November 27 Meeting with Employees..................855

f. Conaway’s November 27 Conference Call..........................856

g. Conaway’s Lies to his Board.....................................857

3. Mr. Conaway’s Misrepresentations Under Oath ........................858

C. Challenge to Claim One-Primary Liability for a Violation of Section 10(b) and Rule 10b-5......................................................865

D. Evidence in the Record Supporting the Jury’s Finding that Charles Conaway Caused the Form 10-Q Violations .............................869

1. Evidence that Charles Conaway Caused the Three Omissions:............869

2. Evidence that Charles Conaway Caused a Misstatement in the MD & A...............................................................876

a. Was there a Materially Misleading Statement? .....................876

b. Did Conaway Cause the Misstatement?............................881

E. Were the Conference Call Statements of Mr. Conaway violations of Section 10(b) and Rule 10b-5..........................................882

F. Evidence in the Record Supporting the Jury’s Conclusion that Conaway Acted with Scienter..................................................886

G. Conaway Aided and Abetted Kmart’s Fraud and Disclosure Violations........888

IV. Conclusion...............................................................889

1. Background Facts.

A. Kmart’s Liquidity Problem.

Kmart experienced a liquidity crisis in the third quarter of 2001 of historic proportions caused in large part by an early $850 million inventory purchase above plan (the “overbuy” (Gilbert, 5/13/09, at Tr00359-60; Moreland 6/27/07, at TrDep00016.)) In the years leading up to the 2001 problem, Kmart had lost much of its market share to rivals Wal-Mart and Target. (Conaway 5/27/09, at p. Tr02021; Beder 12/17/07, at TrDep00301.) Defendant Conaway was hired by Kmart from CVS Corporation as a young, imaginative executive who could reverse the troubles facing Kmart. Further exacerbating Kmart’s liquidity crisis in the third quarter of 2001 were the drop in sales after the September 11th terrorist attack and the launch of an unsuccessful Blue Light Always program with its lower pricing on commonly purchased products that faltered due to a cutback in advertising. (Conaway 5/28/09, at Tr02415-Tr02418.)

The overbuy began in the end of July or early August when Kmart’s President and Chief Operating Officer Mark Schwartz directed a series of inventory purchases that exceeded the company’s operating plan. (Gilbert 5/13/09, at Tr00359; Moreland 6/27/07, at TrDep00016; Plf. Exh. 8). In the first week of August, Scott Gilbert, the Assistant Controller for Accounts Payable, was informed of the overbuy by Assistant Treasurer Mark Moreland. (Gilbert 5/13/09, at Tr00359.) While first believed to be $400 million, the overbuy was later determined to be $850 million. (Id. at Tr00360; Moreland 6/27/07, at TrDep00056; Plf. Exh. 7.)

The Schwartz overbuy was not authorized by Defendant Conaway and was characterized by him as being “reckless.” (Conaway 5/28/09, at Tr02407; Plf. Exh. 188, p. 3). Mr. Conaway’s notes of August 30, indicate that Kmart’s CFO Jeff Boyer was “blindsided” by the inventory buy that was “totally unacceptable” to CEO Conaway who demanded to know “what happened !” (Plf. Exh. 188, p. 3, emphasis in original.) The overbuy had the effect of moving up Kmart’s peak borrowing date and “clearly magnified” the annual liquidity crunch that came in early November when holiday merchandise was acquired and holiday sales had yet to materialize. (Boyer 7/19/07, at TrDep00381; Conaway 2/13/08, at TrDep00330-31.) Executive Vice-President of Merchandise, Cecil Kearse, who worked at Kmart from to 1979 to 2002, was so concerned about the negative trends that he spoke to Conaway to reign in President Schwartz’s continued buying activities, which strained relations between Kearse and Schwartz. (Kearse 5/20/09, at Tr01051-52 and Tr01100-17.)

In an August 17, 2001, letter to the Board of Directors, Mr. Conaway told the Board that the second quarter ended with $283 million more inventory than the prior year due in large part to efforts to improve in-stock position for his new BlueLight Always sales initiative (Plf. Exh. 110.) In the July 9 Board package, there was a liquidity cushion forecast for the peak borrowing date of November 9 at $207 million (Pft. Exh. 4, p. 2.)-Noting decreases in capital expenditures and revised accounts payable terms negotiated in the second quarter, 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.)

Taking the overbuy into account at a time when he thought it was only $ 400 million, Assistant Treasurer Mark More-land, generated a series of cash forecasts for the Finance Committee of the Board projecting that Kmart’s cash needs in October and November would exceed its available borrowing capacity by $135 million and he acknowledged that with such forecasts “the company would be illiquid.” (Moreland 6/27/07, at TrDep00016, TrDep00037-38, & TrDep00040-41; Plf. Exh. 4, p. 2 & 4). This August 15 draft showing a $342 million deterioration in the liquidity cushion from plus $207 million to minus $135 million did not make it to the Finance Committee of the Board. (More-land 6/27/07, at TrDep00040.) An interim liquidity forecast draft showed instead of a negative $135 million, a positive $217 liquidity cushion as of November 8, or $10 million better than the July 17, 2001, Board package forecast (Pft. Exh. 5, p. 3.) The version that actually went to the Finance Committee of the Board, dated August 17, showed a $544 million liquidity cushion on November 9 (Plf s Exh. 6, pp. 2 & 4, Moreland 6/27/07, at TrDep00049-50.) These data apparently supported the projected $600 million liquidity cushion in Mr. Conaway’s August 17th letter to the Board.

Similar optimistic liquidity cushion forecasts were made by John McDonald and Charles Conaway in a September 10 power point presentation to bankers, including J P Morgan Chase which coordinated Kmart’s $1.6 million credit revolver. It showed “peak borrowings” for 2001 at $878 + $35 = $913 million against that $1.6 million revolver leaving a significant positive cushion whereas internal documents showed significant deficits even with a $600 million dollar “Reduction in Receipts” (i.e. receipt of new inventory). (Compare Pft. Exh. 14, p. 44 to Exh. 12).

In forecast scenarios Mr. Moreland prepared for Kmart’s top officers on Kmart’s Executive Leadership Team (the “ELT”) around this time, if sales were flat to the prior year (“Zero Comp Scenario”) and nothing was done to deal with the liquidity crunch, Kmart exceeded its borrowing capacity by $122.7 million on October 3, and by $455 million on November 7 and would be “illiquid” (Plf. Exh. 9; Moreland 6/27/07, at TrDep00058.) Even if sales were up 8%, liquidity turned negative on October 10 (Plf. Exh. 7, at p. 1 a & 3.) If sales were down 3% from the prior year the November 7 deficit would reach $641.8 million. (Plf. Exh. 10.) With a $600 million reduction in future receipts of inventory, zero comp sales showed a liquidity deficit of $597 million on October 24. (Plf. Exh. 12) 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. These late August and September internal scenarios showed a looming deficit of hundreds of millions of dollars, while circulated internally to the Executive Leadership Team (“ELT”) including Defendant Conaway, were not shared with the Board. (Moreland 6/27/07, at TrDep00034-35.)

On September 14, 2001, Jeffrey Stark, Kmart’s Merchandise Controller, sent a memo to Jeffrey Boyer, then Kmart’s CFO, regarding the inventory forecast risk. (Plf. Exh. 260.) In it he stated that even with the forecasted 2.1% sales increase for the remainder of the quarter that still put Kmart with $980 million inventory above plan at the end of September and by $725 million inventory above plan at the end of October. He continued that if sales dropped 1.8% compared to the prior year, then the September number would climb to $1.1 billion above plan, and October would balloon from $725 million to $1.36 billion above plan. With flat sales the inventory overage to plan would be $1.1 billion for September and $1.3 billion for October. At that point the trend was not good, and the effects of the overbuy were not going to go away without work. (Kearse 5/20/09, at Tr01095.) With or without the forecasted 2.1% sales increase Kmart had an inventory problem. {Id. at Tr01096.)

The September Board package included an August Inventory Summary showing total inventory $825 million over “commitment” or plan. (Plf. Exh. 65 at p. 29.) In his September 20, 2009, letter to the Board following the September telephonic Board meeting Mr. Conaway identified “canceling of receipts” and new accounts payable terms as means of managing liquidity, yet, he also noted Kmart’s need for “an additional $500-800 million more inventory in the immediate term.” (Plf. Exh. 113, p 2.) In his October 12, letter to the Board, Mr. Conaway noted ending September with $1.1 billion more merchandise than the prior year, up from the $283 million increase at the end of July noted in his August 17, 2001, letter to the Board. (Plf. Exh. 71, p. 2.)

Conaway admitted that the overbuy had a negative impact on Kmart’s working capital and liquidity, making management of the liquidity crisis a big issue for Kmart (Conaway 2/13/08, at TrDep00317-18; Conaway 5/28/09, at Tr02414-15). Obviously the actual sales decline for the third quarter made things worse.

After the overbuy, the issue of Kmart’s liquidity was discussed at a majority of the weekly ELT meetings. (Boyer 7/19/07, at TrDep00378; Gilbert May 13, 2007, at Tr01072; Conaway 2/13/08, at TrDep00319.) Treasurer John McDonald, not yet part of the ELT, attended many of these meetings and led the discussion on the handling of financing. (Boyer 7/19/07, at TrDep00378.) Kmart could have taken a number of steps to avoid becoming illiquid during that time frame-reducing future inventory purchases, delaying scheduled capital expenditures, accelerating vendor allowances, and making efforts to negotiate sale-leaseback transactions. (Conaway 5/27/09, at Tr02078-81; 80-84; Boyer 7/19/07 at TrDep00378-79). In his October 12 letter to the Board, Mr. Conaway estimated Kmart could immediately get $500 million in the September to November 2001 time frame if it needed to by such asset-based lending but that would require financial disclosures to the Board, banks and stock analyst who followed Kmart. (Conaway 2/13/08, at TrDep00320-22.) Additionally, while the secured borrowing process could have been begun, it likely would have taken too long to prevent Kmart from becoming illiquid. (Moreland 6/27/07, at TrDepOOlOl & TrDep00137; Tucker 5/22/09, at Tr01674-76.) Mr. Conaway chose not to pursue that course of action. (Boyer 7/19/07, at TrDep00385.) Some thought these methods were not chosen because none of them would provide sufficient cash to meet the liquidity needs of Kmart. (Moreland 6/27/07, at TrDep00022.) By late August or early September it be came apparent that efforts to increase collection of vendor allowances, cutting capital expenditures and reducing receipts of inventory, sale leaseback of stores were not going to be sufficient to deal with the $800 plus million overbuy cash problem. (Moreland 6/27/07, at TrDep00020-22.)

Thus, in addition to cutting future inventory receipts to deal with the liquidity problem, Mr. Conaway chose slow paying vendors beyond their negotiated payment terms. This involved unilaterally initiating two programs — later identified as the AP System changes and Project SID (sometimes called the “Moreland process”) — to delay payments to its vendors. (Archambeau 5/13/09, at Tr00270; Conaway 2/13/08, at TrDep00322-24; Conaway 5/27/09, at Tr02084 & Tr02094.) He ordered McDonald to slow pay Kmart’s vendors, specifically prioritizing vendor payments. (McDonald 5/28/09, at Tr02639-40 & Tr02660.)

Kmart chose not to pursue further negotiations on new terms with the vendors because the cash needs were significant and imminent leaving Kmart no time for such talks. (Moreland 6/27/07, at TrDep00023.) Efforts to negotiate longer payment terms, called the “working capital initiative,” had been tried in the prior quarter with limited success and Kmart, in the short run, may have reached the limits of what was possible on better negotiated terms. (Id. at TrDep00099; Boyer 7/19/07, at TrDep00382-83; Archambeau, 5/13/09 at Tr00470-71.) Also, if the liquidity crisis were known to the public there could possibly be a “classic run on the bank where everyone panics, and then— then you’re out of money.” (Levin 9/11/07, at TrDep00175.)

According to Head Merchant Cecil Kearse, in an effort to come into accord with a widespread industry practice, Kmart changed the start date for payment terms from when the order was placed to the date when the goods were received (hereinafter referred to as “extended dating”). (Kearse 5/20/0, at Tr01259.) In addition, Gilbert was called to a meeting with Treasurer John McDonald and Moreland, and asked if there was anything accounts payable could do “to stretch payments” to vendors to help deal with the liquidity issue, which was at the time considered a short term problem likely to be resolved by the end of September. (Gilbert 5/13/09, at Tr00360-61.) On August 7 he held another meeting with Jeff Stark, the Merchandise Controller or head of the merchants or buyers at Kmart, and worked out what vendors they could add days in the payment system to delay vendor payments beyond their agreed payment terms. (Id. at Tr0036471.) An August 14 email from Stark to Gilbert confirmed adding “ + 4/5 days” to weekly paid vendors. (Plf. Exh. 159.) The written Vendor Authorization Forms Kmart had used to set payment terms were not modified to permit this change, nor were the vendors informed of these changes. (Archambeau 5/13/09, at Tr00475; Gilbert 5/13/09, at Tr00371 & Tr00378). This undisclosed, unilateral initiative to stretch vendors, known as the “AP System changes,” was accomplished by modifying the software in Kmart’s accounts payable system to add a fixed 4-5 days to the scheduled payment date for each invoice. (Gilbert 5/13/09, at Tr00359 & Tr00363; Archambeau 5/13/09, at Tr00472-73; Moreland 4/23/09, at TrDep00145.) On September 5, Stark told Gilbert that John McDonald wanted another 5 days delay for daily pay vendors on top of the earlier August delays. (Gilbert 5/13/09, at Tr00381-82; Plf. Exh. 135.) Gilbert noted Kmart paid approximately $70-75 million to hardline vendors each day, so delaying payments five days saved approximately $300 million. (Gilbert 5/13/09, at Tr00373-75.) Moreland also estimated the amounts held back by the AP System changes were in the range of $300 million. (Plf. Exh. 20, at p. 3; Moreland 4/23/09 at TrDep00145^6.) After these two rounds of AP System changes, Gilbert in a September meeting with McDonald and Moreland in McDonald’s office, was informed even with the AP System changes involving most of Kmart’s hardline vendors “liquidity was getting more difficult” and he was asked whether AP could do anything more. (Gilbert, 5/13/09, at Tr00374.) Gilbert said that they could not go further with the Alpha coding changes used in the AP System changes because there were limits. (Id. at Tr00374-5 & Tr00383-84.)

Conaway admits to authorizing the AP System changes stating that Kmart was paying its vendors too fast and they needed to slow it down to levels similar to the ones utilized by Kmart’s competitors Target and Wal-Mart. (Conaway 5/27/09, at Tr02034; Conaway 2/10/05, at TrDep00314.) By adding days Kmart was essentially extending the “loans” they were getting from vendors. (Boyer 7/19/07, at TrDep00382; Moreland 6/27/07, at TrDepOOOll.) Conaway felt that stretching vendors, or as he put it “managing payables,” was essential for Kmart’s turn around. (Conaway 5/27/09, at Tr0208384.) Mr. Conaway testified that these AP System changes were started in late July or early August, were unrelated to the overbuy and were intended to be permanent. (Conaway 5/27/09 at Tr02084-85.) McDonald described his involvement on the working capital initiative starting in October 2000 to get added payment days, and noted additional days were permanently added in August 2001 before they knew about the overbuy, although his testimony is not clear whether this referred to extended dating or the AP System changes. (McDonald 5/28/09, at Tr0265253.) Gilbert was clear that his meetings with McDonald and Moreland in early August to start the AP System changes was in response to the overbuy which was considered a “short term problem,” although the AP System changes stayed in place into January 2002. (Gilbert 5/13/09, at Tr00360-61, Tr00371 & Tr00378).

The AP System changes, however, were insufficient to get Kmart through its major liquidity problem. Thus, with Conaway’s blessing, an additional method of delaying vendor payments was developed. (Conaway 5/28/09, at Tr02429.) The second method was dubbed “Project SID” (for “slow it down”). (Moreland 6/27/07, at TrDep00024.) Conaway referred to it as “prioritize invoices” or “slow pay vendors” claiming that while at Kmart he did not know it by the term “SID.” (Conaway 3/27/09, at Tr02094, Tr02097, Tr02132 1/23/2003, at TrDep00310.) Yet Moreland testified that the week following Labor Day weekend 2001, he used and distributed a prepared document stamped “confidential” entitled “Project SID Process Overview” during a conversation he had with Defendant Conaway and Treasurer McDonald. (Plf. Ex. 11; Moreland 6/27/07, at TrDep00023-24; McDonald 4/23/09, at Tr02426-28; Conaway 5/27/09, at Tr02426-29.) The conversation detailed Project SID’s workings, where instead of delaying payments on all invoices across the board like the AP System changes, an accounts payables working group of Mr. Kearse, Mr. Jellinek and Mr. McDonald, in conjunction with Mr. Moreland, would select a number of the invoices due to each vendor — e.g. 25-30% of that vendor’s invoices — for an additional 30 days delay in payment. (McDonald 5/28/09, at Tr0264143; Moreland 6/27/07, at TrDep00028-30; Moreland 4/23/09, at TrDep00150-51; Gilbert 5/13/09, at Tr00387-38.) The selection of invoices was designed to mislead vendors into thinking individual payments had simply been “hung up in processing” rather than intentionally withheld. (More-land 6/27/07, at TrDep00026.) Invoices were to be selected based on dollar amount, because the larger the invoices the more cash that was delayed being paid, with a majority of the vendors and majority of dollars being affected at some point. (Id. at TrDep00029-30.)

Conaway was very supportive of Project SID because the mechanism of stretching vendors would not be obvious to the vendors. (Id. at TrDep00025-26.) At the meeting Conaway approved Project SID and asked that it be put into place as quickly as possible. (Id. at TrDep00028.) McDonald and Conaway made it clear to Moreland that only a “very limited” number of people were aware of this new effort. (Id. at TrDep00026.) Their concern, as expressed to Moreland, “was that if vendors understood that there was a liquidity crisis occurring, that they may not ship goods; and it could cause ... a very bad public relations issue with the company.” (Id. at TrDep00026-27.)

Other witnesses confirmed that Project SID was intended to be kept a secret from the majority of Kmart’s employees, as it was only talked about behind closed doors. (Lindsey 5/18/09, at Tr00638-29; see also Moreland 6/27/07, at TrDep00026 “very limited”; Gilbert 5/13/09 at Tr00392 “top secret”; Archambeau, 5/13/09, at Tr00487.) Concerned about whether this undertaking was proper, Mr. Moreland commented at the September meeting “at least what we were doing was not — was not illegal.” Both McDonald and Conaway chuckled at his assertion replying that such a scheme is done in every LBO (“leveraged buyout”). (Moreland 6/27/07, at TrDep00027.) Before leaving the meeting Mr. McDonald took Conaway’s copy of the “Project SID Process Overview” noting he “did not need to have it.” (Ibid.).

The Project SID payment delays began on September 19, 2001 and continued through the fourth quarter, with a two week interruption of the program in mid-December. (Plf. Exh. 170; Archambeau 5/13/09 at Tr00493 & Gilbert 5/13/09 Tr00442; Moreland 6/27/07 at Tr00463.) Project SID was not a small undertaking, it was a time-consuming effort that required daily monitoring with multiple large-scale computer runs. (Moreland 6/27/07, at TrDep00030; Archambeau 5/13/09, at Tr00480-87.) Gilbert, who was Assistant Controller for Accounts Payable in charge of account payable, described a typical day as getting into the office at 6:30 a.m. to get work done before the vendors’ calls began, prepare for the 9 a.m. meeting with Moreland and McDonald, handle calls all day after that meeting until early evening again trying to get his normal job functions done until 8 p.m.. (Gilbert 5/13/2009, at Tr00357 & Tr00413.) This pace was all of November, half of October and part of December and Mr. Gilbert attributes this as having contributed to his divorce. (Id. at Tr00414.) While a majority of vendors were affected by Project SID, certain vendors were excluded such as trucking companies who were deemed to be too “sensitive” for Kmart’s operations. (Moreland 6/27/07, at TrDep0002930.) Mr. Archambeau, who was in charge of each days computer check runs after getting from Moreland the list of invoices to be delayed, worked overtime, ten to twelve hour days minimum, weekends and holidays, not allowing anyone else in his department to perform the task because with the fewer people knowing about Project SID the easier it was to keep it under wraps. (Archambeau, 5/13/09, at Tr0048688.) Mr. Archambeau — who worked for Kmart since 1980, and at headquarters since 1982 — felt that project SID was unethical, not done in the past and he was concerned for his staff. (Id. at Tr0048788.) “This was totally out of the ordinary from anything we ever done in the past.” (Id. at Tr00500.) “It was not something we had particularly done in the past and to me holding vendor payment without their knowledge, it didn’t seem to me fair, I guess is how I would have to explain it.” (Id. at Tr00499.)

Scott Gilbert, who headed accounts payable, also noted that project SID “was something that has never been done before. And we — it was just top secret.” (Gilbert 5/13/2007, at Tr00392.) Mr. Gilbert had 300 people under him, about 50-60 handling vendor calls about delayed payments. (Id. at Tr00417.) Of these he only informed three or four “direct reports” about Project SID and the AP System changes.

' Daily invoices could range from 20,000 to 100,000, for Kmart’s 5,000 plus vendors and at times under Project SID 80-90% of that day’s invoices could be held back (Archambeau, 5/13/09, at Tr00490-91; Gilbert 5/13/09, at Tr00429.) These payment delays were not small amounts, one $3.3 million payment to an important DVD supplier and $1.6 million to Pepsi, $2.9 million to Gillette were selected for delayed payment (Plf. Exh. 170; Archambeau, 5/13/09, at Tr00494). Plaintiffs Exhibit 170 is a two inch, two sided print, copy of the thousands of vendors involved. Mr. Gilbert used a November 9 printout of a November 7, 2001, computer run showing $553,871,834 of $2,381,092,541 due, or 23.3%, being held back under Project SID on hardline invoices as of November 7, which was in addition to the $300 million being held back with the AP System changes and additional Project SID soft-line invoices being held back. (Plf. Exh. 41, Gilbert 5/13/09, at Tr00394-98.) More-land’s Project SID Master Tracking Document showed $700 million in both hardline and softline invoices being held back on November 7, in addition to the $300 million under the AP System changes. (Plf. Exh. 289A and Plf. Exh. 20; Moreland 5/23/09, at TrDep00163-64.) As of November 7, the weighted days delay on all invoices was thus stretched to 43.5 days, compared to the usual 30 days payment cycle. (Plf. Exh. 41.) Gilbert noted a similar $564 million on hardlines being held back from $2.5 billion invoices due on November 12 (22.4% of the total invoices), which again did not include the softline and AP System changes delayed payments. (Plf. Exh. 288; Gilbert 5/13/09, at Tr00404.) More-land’s Project SID tracking for November 12 showed $673 million being held back under SID for softline and hardlines, again separate from the $300 million under the AP System changes. (Plf. Exh. 289A and Plf. Exh. 20.) Gilbert’s and Moreland’s figures for November 27, 2001, were $283 million and $263 million under Project SID (Plf. Exh. 54 & 289A.)

Kmart had an online vendor portal or “window” called Workbench, where its vendor could log on and follow their invoice’s payment history. (Gilbert 5/13/08, at Tr00376-77; Moreland 6/27/07, at TrDep00087.) Gilbert, concerned about vendor complaints likely to be directed to his department, noted that through Workbench vendors could see the difference between the payment dates and the agreed on due dates. (Gilbert 5/13/08, at Tr00377.) Moreland noted with Workbench vendors would have seen the large amount of payables getting “hung up in processing.” (Moreland 6/27/07, at TrDep00087.) In September Kmart’s President Mark Schwartz shut down Workbench, and it remained down through January 2002. (Plf. Exh. 68; Gilbert 5/13/08, at Tr00378.) It was shut down due to the volume of calls from unhappy vendors. (Conaway 2/13/08, at TrDep00332.) After the shut down, instead of vendors having access to their accounting information, they were greeted with a generic message stating the system was down for maintenance. (Plf. Exh. 68; Kearse 5/20/09, at Tr01158-59.)

In the first week of November Gilbert was called to Mr. McDonald’s office to attend a meeting with Messrs Conaway, Moreland, Boyer and Kearse to discuss the slow pay of vendors. (Gilbert 5/13/09 at Tr00445-46.) Mr. McDonald introduced Gilbert to Mr. Conaway as being in charge of accounts payable and Mr. Conaway noted it was nice meeting him and referred to him as “a franchise.” (I'd) One suggestion made at that meeting on delaying payments was simply to hold up mailing the checks but as Gilbert pointed out, in Mr. Conaway’s presence, the vendors would notice the dates of the checks and postmark two weeks later and they would immediately know exactly what Kmart was doing. (Id. at Tr00447.)

Although Kmart had a reputation for stretching vendors a few days (Stallkamp 5/18/09, at Tr00838 & Tr00848) and had, at times, delayed payments to vendors (Moreland 6/27/07, at TrDep00032), the liquidity crunch in the third quarter of 2001 was more severe than normal and it had never been done on such a scale before. (Kearse 5/20/09, at Tr01275.) Even Mr. Conaway acknowledged that he did not recall having to prioritize invoices to manage a liquidity crunch of the previous year or in his eight years at CVS Pharmacy. (Conaway 2/13/08, at TrDep00330-31.)

Mr. Archambeau’s office was next to Mr. Gilbert’s and he observed the situation with the vendors, their nearly “non-stop” calls and screaming which he described as “hectic,” “stressful” and “pretty ugly.” (Archambeau, 5/13/09, at Tr00498-99.) Mr. Gilbert had a white board in his office the entire length of one wall, approximately 12'-15' x 4'-5', covered with writing to record hot button issues such as when vendors were threatening to stop shipment. (Id. at Tr00498.) With vendors not being paid, friction between the vendors and Kmart reached a crescendo during the third quarter with vendors calling what was estimated to be every 70-90 seconds demanding their money. (Gilbert 5/13/09, at Tr00411.)

Karen Lindsey, Treasurer McDonald’s administrative assistant, testified that beginning in September 2001 and continuing into December, she started receiving phone calls from vendors complaining about late payments, though she had never received them before this time. (Lindsey 5/18/09 at Tr00645-46.) The calls to McDonald grew in number to the point that he did not return most of them. (Id. at Tr00646-47.)

On October 27, 2001, Kmart’s then-CFO, Jeffrey Boyer, sent an e-mail to Conaway expressing his concern over the Company’s financial situation. (Plf. Exh. 76; Boyer 7/19/07, at TrDep00391-94.). In it he noted that Kmart was scheduled to receive $900 million in inventory in the first week of November, and that it would not help the Project SID situation. He stated that Kmart would not be able simultaneously to handle the new inventory and pay down the “nearly $800 million in past-due invoices” to manage the “noise level” coming from vendors. Sales shortfalls were compounding the cash crunch by “several hundred million” per month, which was based on actual sales reports, not forecasts. Boyer ended the e-mail by saying that he was “very worried.”

At its peak, Project SID resulted in vendor payment delays of over $790 million on October 31, 2001, according to a contemporaneous spreadsheet maintained by Assistant Treasurer Moreland who managed the program on a day-to-day basis. (Plf. Exh. 289A; Moreland 4/23/09, at TrDep00164.) Moreland testified that the AP System changes involved about another $300 million delayed vendor payments for the two separate 5 day extensions of hardline invoices. (Id. at TrDep00145-46; Plf s Exh. 20.) Regarding these figures, Mr. Moreland was confident they were directionally accurate meaning plus or minus 10%. (Id. at TrDep00167.) Between the AP System changes and Project SID, Moreland’s Master Tracking Document and the October 4 Cash Flow Management chart show Kmart held back $600 million in early October and over $1 billion in vendor payments from October 24 through November 7, 2001, Kmart’s peak borrowing date. (Plf. Exhs. 20, p. 3, & 289A). According to Moreland, SID was the “most significant short-term liquidity action the company undertook.” (Moreland 6/27/07, at TrDep00082.)

Both of these programs strained relationships with vendors which raised concerns with Kmart’s ELT that vendors may not pay year end allowances. (Kearse 5/20/09, at Tr01074-75.) This concern was compounded by Kmart not hitting its sales targets. (Id. at. Tr01075 & Tr01230.) These allowance payments from vendors, which were based on meeting certain sales targets, were important to Kmart’s liquidity, and were a “huge part” of final profitability. (Id. at Tr01074.)

B. The Cover-Up Story: Project eLMO.

With the growing pressure from vendors on the Kmart merchants (buyers) and accounts payable personnel working under Gilbert there was a desire to get out a consistent message that would allow Kmart to get to late November without creating additional questions or panic in the marketplace and without revealing cash flow problems or the intentional slow pay. (Kearse 5/20/09 at Tr01140-41.). Conaway, during a November 2 meeting with the ELT, had his secretary call McDonald to his office to discuss the development of Talking Points which would create a consistent story Kmart could communicate to its vendors to explain away the payment delay. (Plf. Exh. 35 & McDonald 5/28/09, at Tr02645-46.) McDonald testified that he was called up to the office, took notes and “then I took that list, went downstairs to my office, told Mark More-land, told him he had to meet with Cecil Kearse and they were to lay out what my discussion was with the four gentlemen upstairs” and thus from those notes the “AP System Issues Talking Points” (hereinafter “Talking Points”) were created. (McDonald 5/28/09 pp. 269:11-16 & 280:17-20.) Kearse testified that the concept of Talking Points was discussed with Mr. Conaway in early November, and while the draft of Talking Points was not circulated to the ELT, its basic concept was presented to and understood by “the leadership of our company.” (Kearse 5/20/09 at Tr01140-Tr01143.) Talking Points blamed the delay in vendor payments solely on a computer system called Project eLMO. Project eLMO was an inventory control and accounts payable system which in 2001 converted Kmart’s two separate inventory systems — “hardline” products (such as electronics) and “softline” products (such as apparel) — into a single unified system. Because the changes in eLMO involved adding softlines to the hardlines already on the system, eLMO could not have affected payments on the larger volume hardline products. (Gilbert 5/13/09, at Tr00424-26.) The Talking Points asserted that Project eLMO encountered computer software errors in the accounts payable “complex terming logic” which in turn created a backlog of approximately 750,000 unpaid invoices which had to be manually processed. (Plf. Exh. 35.) These 750,000 invoices allegedly affected were an arbitrary number made up by McDonald who did some calculations on the back of an envelope, a number which was significant, but not too large. (Moreland 6/27/07, at TrDep00087.) Mr. Gilbert noted that eLMO had no effect on payments of either softline or hardline vendors. (Gilbert 5/13/09, at Tr00505-56.) Mr. Archambeau, whose department was largely responsible for the eLMO conversion, acknowledged it was possible eLMO could cause a softline invoice not to get paid, but he added that they implemented a control system of requiring vendors send a hard copy and an electronic copy of invoices to avoid this problem. (Archambeau 5/13/09, at Tr00502 & Tr00505-06.) He and More-land, who did the initial draft from the working group of McDonald, Kearse, and Jellinek, noted each of the Talking Points regarding eLMO causing delays in payments were false, a fabricated “storyline” or script to tell the vendors. (Id. at Tr0050610; Moreland 6/27/07, at TrDep00085-87.) The delays caused by the AP System changes and from Project SID were separate from the eLMO conversion which Archambeau believed “was very successful.” (Archambeau 5/13/09, at Tr00522.) Like Mr. Gilbert, Mr. Archambeau also testified the conversion did not affect hard line vendors and thus could not cause any delays in invoice payments on hardline invoices which were the majority of purchases. (Archambeau 5/13/09, at Tr00505.) While it was possible a softline invoice might slip through their controls during the eLMO conversion, if that occurred it was “very isolated.” (Id. at Tr00505.) The Talking Points refers to an extraneous purchase order of $109 million being generated by eLMO, but if that was not caught before delivery of the goods, it would not have affected vendor payments. (Id. at Tr00507; Gilbert 5/13/09, at Tr00428 & Plf. Exh. 35.) There was no documentary or other evidence of any vendor actually not being paid on time due to Project eLMO.

ELT member Cecil Kearse, who was involved in the creation of Talking Points, was reluctant to acknowledge that many statements contained in the Talking Points were not true. (Kearse 5/20/09 pp. 93-7.) According to Kearse, the story was developed in order to “build a bridge from point A to point B [later identified as “November 2nd [until] late November”] without creating additional questions in the market place” and that “it was determined that not speaking to cash flow or slow pay would be the best course.” (Kearse 5/20/09, at Tr01138 & Tr01140.) Kearse testified that the eLMO story was “a small part, if not insignificant to the truth” and he acknowledged that cash flow was the real reason vendors were not being paid, not eLMO. (Id. at Tr01206-07.) Ultimately Mr. Kearse admitted that eLMO was “definitely not the reason why [vendors] weren’t getting paid.” (Id.)

While Mr. Conaway denies calling McDonald to an ELT meeting to take notes regarding Talking Points, he admits a meeting with Boyer and Schwartz and Kearse, which McDonald joined, where Kearse wanted to talk about communication with vendors. (Conaway 5/28/2009 at Tr02626-27.) He acknowledge that his Outlook Calendar for November 2 shows an entry “Vendor Talking Points w/ John, Cecil, Mark, Jeff.” (Id. at Tr02627 & Plf. Exh. 190 at November 2, 2001.) While Talking Points clearly uses eLMO as the only reason for the vendors being paid late, Mr. Conaway denied the ELT making a decision that eLMO would be the only reason given to vendors for slow pay and he said anyone saying otherwise was lying. (Conaway 1/27/03, at TrDep0030809.)

Mr. Conaway testified that his belief that eLMO caused vendor delays came from Lorna Nagler, who was then Kmart’s Senior Vice President of Apparel and Jewelry, who told him that her part of Blue-Light Always was in jeopardy because of eLMO and the “inability to process invoices” for vendors and of the need to get “system integration issues corrected.” (Conaway 2/13/08, at TTDep00334-35, 5/27/09 at Tr02162-63.) Ms. Nagler testified to the contrary. (Nagler 4/18/08, at TrDep00349-51.)

The payment delays caused angry vendors and factors (those who “fronted” money to vendors and were assigned accounts payables for collection) to demand payment, some threatened to stop shipments. (Archambeau 5/13/09, at Tr00497.) Some major vendors, including Black & Decker, 3M, AC Deleo, and General Electric, did stop shipment of their products. (Plf. Exhs. 237, 238 & 257.) Some vendors indicated that they would resume shipping if their calls were returned, but communication to vendors was silent. (Kearse 5/20/09, at Tr01136.).

The CEO of Sunbeam, Jerry Levin, after failing to reach Kearse called Conaway directly to demand payment for $25 million worth of unpaid invoices. (Levin 9/11/07, TrDep00173.) With no reply phone call from Conaway, Levin wrote a letter to him demanding payment which letter indicated he had been told the problem was due to “Kmart’s accounts payable system conversion.” (Plf. Exh. 107.) Without using the term “Project eLMO” Conaway’s response letter referred to “the breakdown we have had on our hard lines and soft lines integration” to explain the reason for the delay of payment. (Plf. Exh. 108.) Conaway testified that he did not write the letter, that most likely his secretary wrote it and used his signature stamp. Yet during a 2003 deposition he testified that he had dictated the letter “from the field” which was typed by his secretary, his signature stamped and sent to Levin. (Conaway 1/22/03, at TrDep00309-10.)

Maurice Sabony, a representative of Mil-berg Factors, was told on at least six occasions in October and November of 2001 that the late payments were due to the Project eLMO glitch. (Sabony 2/28/08, at TrDep00200-12, specifically at pagedines 63:6-64:10, 65:23-66:18, 69:4-73:25, 76:9-79:21, 79:22-81:2, 87:15-89:8.) He received the Project eLMO excuse from three different people at Kmart, including Gilbert and McDonald, even after he expressed doubt that this was the real reason for the delays. On November 29, 2001, he received a fax from a client that included a letter from Kmart explaining that the late payments were due to problems with the eLMO system. (Id. at TrDep00217-19 & Plf. Exh. 196.)

C. Communications with the Board.

As noted above, in mid- to late-August 2001 Kmart’s senior management received a series of liquidity forecasts Assistant Treasurer Moreland prepared showing that the company was facing cash needs that could exceed its borrowing capacity by up to $1 billion. (Plf. Exhs. 4, 5, 6 & 7). McDonald presented these forecasts to Conaway and the other members of the ELT. The cash needs caused by the overbuy was never communicated to the Board of Directors. (Moreland 6/27/07, at TrDep00055-56.)

On August 17, 2001, Conaway sent a letter to Kmart’s Board, even though there was no Board meeting scheduled for that month, as a response to the Board’s request at the previous meeting for “more frequent financial reports.” (Plf. Exh. 110.) Board member Thomas Stallkamp testified that the statement in the letter regarding Kmart ending the second quarter with $283 million more inventory than the previous year was not unexpected, because increasing inventory was part of the business plan. (Stallkamp 5/18/09, at Tr00728.) Yet, at that time, the Board had not been informed about the overbuy. (Id. at Tr00729.) Stallkamp, who had served as President and Treasurer of Chrysler Corporation, also testified that his understanding of the phrase “revised accounts payable terms” was that Kmart had approached vendors to negotiate longer payment terms, not that it was done unilaterally or without vendor consent. (Id. at Tr00708 & Tr00730.)

Because of the importance of the changes Conaway was implementing, they had scheduled a two day gathering of the Board in September. Mr. Conaway had been warned by Kmart’s former CEO to keep the board packages manageable in size and to end the meetings by noon. (Conaway 5/27/09, at Tr02104-05.) Conaway and others noted that two board members slept through meetings. (Id. at Tr02104.) Board member Stallkamp did not recall Board members sleeping during the meetings though he acknowledged it could have happened. (Stallkamp 5/18/09, at Tr00855.) The events of 9/11 forced the September Board meeting to be handled by telephone and cut the time down to its usual 3 hour time frame (Conaway 5/27/09, at Tr02106.) As a result, on the inventory problem and its solution, it was thus necessary to give the Board “a shortened version of the strategy piece.” (Id. at Tr02106.) Mr. Conaway noted that he often did not have time to edit the Board package before it went out, and thus would make notes on his copy or a separate sheet of paper to make sure he covered additional points at the Board meetings. (Id. at Tr02110 & 02121-22.)

Mr. Conaway contests that the Board was not informed about the actions taken to manage payables. He testified that at the telephonic September Board meeting the liquidity cushion forecast on the peak borrowing day was only $96 million, which compared to an August forecast to the Board of $544 million (Def. Exh. 119, p. 17, Conaway, 5/27/09 at Tr02113-14.) The first priority on the “Short Term Liquidity Actions” page, which was prepared by CFO Boyer, was cutting receipts of inventory by $600 million by October 3. (Def. Exh. 65, at p. 20; Conaway, 5/27/09, at Tr02114.) He discussed the other three listed Short Term Liquidity actions in the Board Package — shifting capital expenditures into the fourth quarter, getting a new 364 day revolver, and various sale-leasebacks that were planned. While not listed on the Board’s Package page 20 on Short-Term Liquidity Actions, as were the other four items noted above, Mr. Conaway testified:

The second most important thing we were doing was managing our payables, stretching our vendors.

So, I wanted to make sure the board was aware of that, given the criticality of it. This particular that I talked about, that we had already extended dating. So, we had already took it dating, starting back in August. So, that had already occurred. We had taken them in two different series, one in the beginning of August, one toward the mid or late August. So, this was letting them know we had already pushed our suppliers in addition, and that’s how we were going to run the business on top of what previous management had done.

In total when we looked at it, we wanted to get about five days. The reality during this forecast was it was about three days. And we talked about how long it took to cycle through. So, we had already taken that action.

And then we had to manage the payables, and what we figured at this time was another additional, on top of that, anywhere from an additional kind of three to four to five days. We weren’t really sure, but we thought it would be probably be at its peak at least another five days.

And that is indicated by the second point, that we are going to try to extend supplier terms wherever we can, but we’ve got to add on those additional three to five days no matter what, and we will continue to stretch vendors if we can’t get, you know, terms.

And it’s also not just terms. Again, we are managing days. It could be changing policies, as we spoke of earlier. But one way or the other, we had to add additional three to five days over what we had already adding, that we were going to do irrespective of the credit crunch. But because of this liquidity crunch, we had to add more days.

Q. And underneath that, what is your writing indicate you are telling the board?

A. Well, again the two biggest items, A, I wanted them to fully understand that we were managing payables, that we were stretching vendors and we were going to have to stretch them more. That was going to have to happen. The second key component which is the number one thing I said we were doing was this reduction in inventory receipts....

Id. at Tr02116-17.

These assertions seem to discuss the efforts taken in the prior quarter to extend vendor terms through negotiations, and to extend dating of the payment period to begin running not from the date of the purchase order but from the date of receipt of the goods. Yet the “additional three to five days no matter what” seems possibly to refer to one of the two 5-day AP System additions to the hardline vendors that Moreland discussed as being unilaterally imposed. This testimony suggests that Mr. Conaway told the Board that in addition to extending payment terms through negotiations, when that failed Kmart would, if needed, unilaterally extend the payment terms (“it’s also not just terms. Again, we are managing days. It could be changing policies.”) Nothing in Mr. Conaway’s testimony suggests he disclosed the 30 plus day delays of the Moreland plan for Project SID. Also, the handwritten notes Mr. Conaway made on his copy of the September Board package to remind him to discuss certain things only seem to support “extended dating” and “supplier terms” as well as “chasing receipts,” i.e. cutting the receipt of new merchandise. (Def. Exh. 119, at p. 20.) These three initiatives— negotiating better supplier terms, extending dating for payment to date of receipt, and cutting future inventory purchases — 'likely could have been discussed without any Board opposition, which the more aggressive means of unilaterally stretching vendors would have drawn from Board member Stallkamp who would have opposed such a move had it been raised. (Stallkamp 5/18/09, at Tr00741 & 00781.) There are no Conaway handwritten notes on page 20 of Conaway’s September Board package (Defendant’s Exhibit 119) indicating unilaterally adding days without the vendor’s consent.

Mr. Conaway also testified that he drew to the Board’s attention to the overbuy noting that the August Inventory Summary on page 29 of the Board Package showed a negative $825 million inventory variance to “commitment” or plan. (Conaway, 5/27/09 at Tr02122-23, Def. Exh. 119 & Plf. Exh. 65, at p. 29.) He testified that when Board Member Stallkamp said the Board was not informed about the overbuy until the November Board meeting, he was mistaken. (Id. at Tr02123) Mr. Conaway wrote a September 20 letter to the Board because of his frustration with their lack of attentiveness and caring. (Id. at Tr0212426.) In that letter he noted:

I fully appreciate the sent of urgency on managing our liquidity. I am fully confident our recent extension of Kmart’s revolver (club deal), canceling of receipts, new accounts payable terms and reduced capital expenditures, we will insure liquidity. You have my assurance of monitoring this situation as my # 1 priority over the next 6-10 weeks.

Plf. Exh. 113.

While this September letter adds “new accounts payable terms” to the actions to deal with liquidity, similar to Conaway’s handwritten note “supplier term” on his page 20 of the September Board package, this term seems to deal with bargained for terms and not the unilateral AP System changes or Project SID. That was how Board member Stallkamp interpreted “new accounts payable terms” in that letter. (Stallkamp 5/18/09, at Tr00754.)

Later in the September 20 letter after noting an “immediate term” need for “an additional $500-800 million more inventory” he noted as one of the focuses for the Board:

b. Manage all components of working capital given inventory needs, accounts payable, supplier terms, accounts receivable, and reducing capital expenditures to minimum levels.

He testified that liquidity being his “number one priority” was an exaggeration because he thought the problem was “self-inflicted” and would be over in the next 6-10 weeks. (Conaway, 5/27/09 at Tr02127.)

When asked what “manage ... account payables” in paragraph b. means, Mr. Con-away responded:

A. That means that we are going to continue to manage to a certain number as we run this business, until we get a good capital structure, separate and above from supplier terms, which is negotiated.

Q. So, how do you manage to a certain number in addition to negotiating supplier terms?

A. It’s exactly what I explained. It’s what we were doing. It is what I explained to them in the September Board meeting. You say I need to get to ten additional days, right. You manage to that number. And supplier terms are separate than that. If supplier terms can help you do that, that’s great. That’s why they are separate.

Q. How do you get to that number in addition to negotiating?

A. You’ve got to stretch numbers, slow pay them, you know, pay them slower.

Id. at Tr02132.

While here “manage ... accounts payables” is separated from managing supplier terms, the September 20 letter is less than clear that this refers to unilaterally adding days to vendor payment. The “ten additional days” he referred to at trial as being separate from “supplier terms” may refer to the 5 days + 5 days that were unilaterally added to hardline vendors under the AP System changes. While this statement may have been meant to suggest that Mr. Conaway told the Board about this unilateral move at the September Board meeting, that is a disputed fact with Board member Stallkamp denying being told that at the September Board meeting or in the September 20 letter. (Stallkamp 5/18/09 at Tr00740-41 & Tr00754055.)

In an October 12, 2001, letter Conaway informed the Board that Kmart’s September sales were flat and its September inventory was up $1.1 billion from the prior year with “much of the inventory increase ... due to our efforts to improve in-stock and support BlueLight Always” (Plf. Exh. 71.) Unlike the September 20 letter’s statement of a need for “an additional $500-800 million more inventory in the immediate term”, this letter notes the need to “reduce inventory by the end of the third quarter.” (Compare Plf. Exh. 112, p. 2, Plf. Exh. 68, p. 2.) The October letter makes no reference to the Schwartz August overbuy. The letter also states:

We have made significant progress on several of our working capital initiatives. Our efforts to work with our vendor partners on terms changes have been successful. Our A/P leverage ratio has improved dramatically from 33% in July to 42% in September.

Board member Stallkamp testified that he understood this to mean that Kmart had been negotiating with vendors for longer terms, and there was no indication that the increased AP ratio was due to Kmart unilaterally delaying payments to vendors. (Stallkamp 5/18/09, at Tr00771 & Tr0077374.)

If CFO Boyer learned at the September Board meeting from what Mr. Conaway claims he told the Board that his page on “Short-Term Liquidity Actions” should have included stretching vendors or “managing payables,” Mr. Boyer again failed to put that in the October 23 Board package which notes only shifting capital expenditures, sale-leaseback, and refinancing the credit revolver under Short Term Liquidity Actions. (Plf. Exh. 114, p. 30) Again, Mr. Stallkamp testified that neither that page of the Board package nor anything told the Board at their October meeting revealed that Kmart was unilaterally delaying payments. (Stallkamp 5/18/09, at Tr00779-80.)

At the October 23 telephonic Board meeting, in discussing his notes on his copy of the October Board package giving updates “on the previous September board package,” Mr. Conaway testified that the “33” referred to the 3 days they were adding to the 30 day payable terms that he claims he had told the Board about at the September meeting. (Conaway 5/27/09, at Tr02143^4, Plf. Exh. 27, pg. 2) The “38” included the 5 additional days added since that September Board meeting which he “wanted to make sure” they were aware of in addition to what “I told them, you know, 30 days earlier.” (Conaway 5/27/09, at Tr02144.) The “41” referred to the need to add another 3 days. “So I wanted them to absolutely know we had gone further than I had told them we were probably going to have to go in managing payables, and we still had farther to go as of this point.”

As with the September and October Board Packages, the November 20 Board presentation omitted any direct reference to the intentional vendor delay tactics or the August overbuy but it did note a 1.5% drop in comparable sales (2.2% down overall) for the Third Quarter and inventory being $600 million off plan (PI. Exhs. 121 Bates #CC 0096834-35, CC-0096841 & CC-0096862.)

On November 8, 2001, CFO Boyer had a one-on-one meeting with Conaway lasting 90 minutes to two hours because he felt there were significant matters that needed to be discussed. (Boyer 7/19/07, at TrDep00395.) Boyer wanted to highlight three issues — “financial performance of the company, the liquidity situation and the allowance issue.” (Boyer 7/19/07, at TrDep00409.) Unlike his usual one-on-one meetings with the CEO, Mr. Boyer had prepared a 27 page Power Point presentation for this meeting to make sure he covered all of the important points. (Boyer 7/19/07, at TrDep00395.) He thought it was important to talk about how serious the situation was and, as part of their worst-case scenario, discuss the possibility of bankruptcy. (Id. at TrDep00400.) While disputed