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The U.S. Securities and Exchange Commission has won a 90-day extension for its probe into alleged accounting irregularities by former senior managers of Troy, Mich.-based Kmart Corp. The watchdog agency was granted the extra time by Judge Susan Pierson Sonderby in U.S. Bankruptcy Court for the Northern District of Illinois in Chicago so it can determine if it should continue an investigation of the bankrupt retailing giant. If the SEC finds enough evidence of wrongdoing, it could file a formal proof of claim against Kmart, said Angie Dodd, senior bankruptcy counsel for the SEC’s Midwest regional office. The SEC is one of three U.S. agencies looking into anonymous allegations of misdeeds by the company’s former executives. The government probes are proceeding alongside an internal inquiry by Kmart. The extension of the SEC’s deadline to Oct. 29 from July 31 comes as Kmart’s lead counsel is calling on the whistle blowers who triggered the investigations to step forward to help Kmart get to the bottom of the matter. The SEC, the U.S. Attorney’s Office and the U.S. House Energy and Commerce Committee, chaired by Rep. Bill Tauzin, D-La., are all investigating Kmart. The counsel for the retailer is calling on anonymous letter writers to clarify their allegations that senior managers received retention loan bonuses from the company in the months just before Kmart’s bankruptcy filing. Such bonuses are usually made to keep executives from fleeing a troubled company. Jack Butler, Kmart’s counsel in the Chicago office of Skadden, Arps, Slate, Meagher & Flom, is blaming the refusal by the whistle blowers to present themselves to investigators as a major stumbling block in the internal probe, Kmart said. The company expects to take legal action against certain employees before its probe is complete but is running into difficulties talking to potential witnesses, Kmart said. Kmart is asking employees who have information to contact company management, its outside law firm, the SEC or the FBI, according to court documents. The internal Kmart probe was scheduled to be completed by July 24 but is now expected to extend through the end of the year. In an unusual twist, Sonderby rejected Kmart’s petition Wednesday, July 24, to hire Dewey Ballantine as special counsel to its board. Sonderby ruled under Section 327(E) of the Bankruptcy Code that the interests of board do not coincide with the interests of the debtor’s estate and thus constitute a conflict of interest. “Judge Sonderby ruled that the interests of the directors are adverse to the interests of the estate and that Section 327 (E) only allows for retention of professionals whose clear purpose is to serve the estate without a conflict of interest,” said public relations consultant Michael Freitag of Kekst & Co., who was at the hearing. Kmart, which argued that many debtors rely on that section when hiring professionals, is expected to revive the retention order under a different section of the Code at its next hearing on Aug. 29. Kmart’s internal investigation has also been bogged down by the introduction of three court-sanctioned committees that were unofficially added to its so-called stewardship review, Freitag said. Kmart will seek court approval on Aug. 29 for participation by the equity, financial institutions and unsecured creditors committees in its internal probe. Sonderby approved Kmart’s motion Wednesday to retain Paul Traub and Traub, Bonacquist & Fox for the recently formed equity committee and Randall Klein at Goldberg, Kohn, Bell, Black, Rosenblum & Moritz as local co-counsel. She also approved the hiring of Saybrook Capital LLC in Santa Monica, Calif., as financial adviser. Sonderby also gave Kmart approval for extension of its exclusive right to file a reorganization plan for six months through next February. Copyright �2002 TDD, LLC. All rights reserved.

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