01:00 AM EDT on Friday, June 30, 2006

BY PAUL GRIMALDI
Journal Staff Writer

A federal judge in Michigan this week approved a settlement in a class-action lawsuit filed against a group of former Kmart Corp. executives, including one with ties to Rhode Island.

On Tuesday, a U.S. District Court judge approved an agreement that gives approximately 125,000 employees and retirees of Kmart $11.75 million to settle their 2002 claims against the company executives, Charles C. Conaway among them.

Conaway was once a top executive at CVS Corp. in Woonsocket.

Kmart employees filed the suit in Troy, Mich. -- Kmart's former home -- claiming they lost more than $100 million in benefits because their company retirement fund invested too heavily in Kmart stock.

Court-sanctioned mediation in the case fell apart in 2004, leading to years of legal proceedings.

The ruling does not end the legal troubles for Conaway, who once served as Kmart's chairman and chief executive officer, and John T. McDonald, the discount retailer's former chief financial officer.

Last August, the U.S. Securities and Exchange Commission accused the two men of making "materially false and misleading" disclosures to shareholders before the retailer's 2002 bankruptcy filing.

The SEC complaint, filed in U.S. District Court in Detroit, charges them with securities fraud and aiding and abetting securities fraud. It also accuses them of aiding and abetting violations of rules that require publicly traded companies to file quarterly reports and to include material information in the reports so they are not misleading.

The case is still pending.

The SEC's charges followed an arbitration panel's decision last summer clearing Conaway of civil accusations that he squandered millions of dollars as Kmart slid into bankruptcy.

That decision was the result of a lawsuit that a creditors' trust filed in 2003 against six former Kmart executives.

Conaway cofounded Reliable Drug Stores Inc., of Indianapolis, in 1989. He left Reliable for CVS in 1992, where he was brought on board as senior vice president of pharmacy.

Three years later he was promoted to chief financial officer of the drug retailer and its one-time parent company, Melville Corp.

Conaway was named president and chief operating officer at CVS in 1999, but left a year later to return to his home state as head of Kmart.

Conaway arrived at Kmart as the chain struggled in the battle with discount giant Wal-Mart and other, more nimble retailers.

Kmart filed for bankruptcy on Jan. 22, 2002, leading to the closing of about 600 stores, termination of 57,000 workers and cancellation of company stock. Kmart's board of directors forced out Conaway in January 2002.

Kmart emerged from bankruptcy in May 2003 as Kmart Holding Corp., a company controlled by hedge-fund manager Edward S. Lampert.

Kmart merged with Sears, Roebuck and Co. last year and moved its headquarters to Hoffman Estates, Ill., where Sears was based.

Kmart has since been winding down its presence in Troy, its headquarters since 1972.

Earlier this month, Kmart announced plans to sell more than 1,000 works of fine art it owns. The pieces include works by Pablo Picasso, Andy Warhol and a 15th-century Chinese Ming Dynasty watercolor.

Kmart sold the 40-acre headquarters site last year and started selling its office furniture last month.

pgrimald@projo.com / (401)-277-7356