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Dow Jones Corporate Filings Alert

Kmart Unit Pleads Guilty To Mail Fraud In Puerto Rico

November 6, 2002
Copyright © 2002 Dow Jones & Company, Inc.. All rights reserved. 

WASHINGTON -(Dow Jones)- Kmart Corp. (KM) unit S.F.P.R. Inc. has pleaded guilty to one-count of mail fraud in the U.S. District Court in Puerto Rico and agreed to pay a $2 million fine in connection with damage claims related to a 1998 hurricane, according to papers filed with the U.S. Bankruptcy Court in Chicago late Wednesday.

Kmart said that on Oct. 28 it and the unit entered into a plea agreement with the U.S., under which the unit pleaded guilty to a one-count "information" charging it with mail fraud under Title 18 of the U.S. Code. The court sentenced the unit and recommended a fine of $2 million, plus a three-year probation, according to court papers. Subject to bankruptcy court approval, Kmart agreed to transfer the funds to the unit and guarantee payment of the fine, according to court papers. Kmart has been operating under Chapter 11 since January.

The matter relates to $10.85 million in insurance claims Kmart made for damage to its stores in Puerto Rico from Hurricane Georges, which struck in September 1998. During the course of disputes between Kmart and some of its insurers, the U.S. Attorney opened an investigation into the company's casualty loss, the actions of its employees in determining damages caused by the loss and the ensuing insurance claims, according to court papers.

Kmart said it cooperated fully with the investigations and took all actions to insure the claims finally submitted to its insurance carriers didn't contain any inappropriate losses.

"Nevertheless, as a result of both this investigation and Kmart's own internal investigation," the companies entered the plea agreement, Kmart said in the court filing.

Kmart has also sought court approval to settle a dispute with General Star Indemnity Co. over the insurance claims. Kmart had asserted it was owed $3 million from the insurer, which claimed the full amount of Kmart's damages had been paid by other insurers.

The settlement calls for General Star to pay $850,000 to Kmart to settle the dispute.

Kmart said that with the settlement, it will have settled all disputes with its insurance carriers over the matter, recovering $7.65 million of its original $10.4 million claim.

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