Sears 2008 Annual Report Download - page 90

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
August 21, 2008, the appellate court reversed the trial court’s judgment and entered judgment in favor of Sears on all
counts. Plaintiffs’ subsequent motion for rehearing was denied. The deadline for filing a petition for review with the
Texas Supreme Court is April 4, 2009.
As previously reported in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005, the
staff of the Securities and Exchange Commission has been investigating, and the U.S. Attorney for the Eastern District
of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor allowances before a change in
accounting principles at the end of fiscal 2001 and the disclosure of certain events bearing on the Predecessor
Company’s liquidity in the fall of 2001. Kmart has cooperated with the SEC and the U.S. Attorney’s office with
respect to these matters, which are ongoing.
On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern District of
Michigan against the Predecessor Company’s former chief executive officer and its former chief financial officer
alleging that they misled investors about the Predecessor Company’s liquidity and related matters in the months
preceding its bankruptcy in violation of federal securities law. The complaint seeks permanent injunctions,
disgorgement with interest, civil penalties and officer and director bars. Kmart is not named as a defendant in the
action. In its press release announcing the filing of the complaint, the SEC stated that its Kmart investigation is
continuing.
We are a defendant in several lawsuits containing class-action allegations in which the plaintiffs are current and
former hourly and salaried associates who allege various wage and hour violations and unlawful termination practices.
The complaints generally seek unspecified monetary damages, injunctive relief, or both. Further, certain of these
proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate
defendants. One of these class-action lawsuits described above is Moldowan, et al. v. Sears, Roebuck and Company, et
al., a lawsuit filed on August 12, 2004 in the Superior Court of the State of California, County of Sonoma in which
plaintiffs allege that Sears failed to pay them for all hours worked and otherwise failed to pay them correctly for work
performed in accordance with California law. Plaintiffs seek monetary damages in an unspecified amount, together
with attorneys’ fees, interest, statutory penalties and punitive damages. The parties have settled the matter and
plaintiffs have filed a motion for preliminary approval of the settlement. In agreeing to the settlement, defendants did
not admit any wrongdoing and denied committing any violation of law. Defendants agreed to the settlement solely to
eliminate the uncertainties, burden and expense of further protracted litigation. We previously established a reserve for
the expected settlement and it will not have a material adverse effect on our annual results of operations, financial
position, liquidity or capital resources.
We are subject to various other legal and governmental proceedings, many involving litigation incidental to our
businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other
consumer-based claims, each of which may seek compensatory, punitive or treble damage claims (potentially in large
amounts) or as well as other types of relief.
In accordance with SFAS No. 5, “Accounting for Contingencies,” we accrue an undiscounted liability for those
contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated and we do not
record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be
reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Because litigation
outcomes are inherently unpredictable, these assessments often involve a series of complex assessments by
management about future events and can rely heavily on estimates and assumptions. While the consequences of certain
unresolved proceedings are not presently determinable, an adverse outcome from certain matters could have a material
adverse effect on our earnings in any given reporting period. However, in the opinion of our management after
consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to
have a material adverse effect on our financial position, liquidity or capital resources.
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