Something was rotten in the state of Kmart, and the free-lance sleuths wanted Kathy Paul to help them clean up the mess.
Agents from Kroll Associates, a New York-based corporate intelligence and investigations firm, had been brought in by Kmart to investigate graft. Kroll’s operatives wanted Paul to help them find crooked buyers — key decision-makers suspected of taking kickbacks or gratuities from vendors desperate to get their products displayed in the discount retailer’s 2,300 stores.
Paul, a longtime and loyal Kmart employee, held the title of “co-buyer” in the burgeoning electronics department. She was subordinate to people with a “buyer” title. Paul hoped to be a full-fledged buyer herself someday.
As it was, she was filling in for a bona fide buyer who had been transferred. She was ordering video games, computer software and accessories, calculators and telephones worth staggering sums. She and the departed buyer bought products that accounted for more than $800 million in sales in 1996.
She had a reputation as a straight arrow, which may be why the private investigators from Kroll sought her out.
Paul was summoned to a meeting in an office Kroll had rented across the street from Kmart’s international headquarters in Troy. Kroll’s agents asked her to serve as an informant.
It was Aug. 28, 1996.
She was hesitant, and understandably so. There was a lot at stake. The divorced mother of a teenage son had worked for the company for 16 years, starting out in a Kresge store when she was in high school. She held no bachelor’s degree, but she had a strong work ethic. Her tenacity and dedication to the company had pushed her up the ladder. She was making $50,000 a year, had options on 800 shares of stock and was eligible for a $7,000 performance bonus.
Yet she was convinced that Kmart was rife with questionable practices and mismanagement. Much of what she saw at work troubled her.
Documents that would be unearthed in her subsequent lawsuit against Kmart indicate that Paul, 44, told the agents from Kroll that she wanted to help. But mindful that nobody likes a stool pigeon, she asked for assurance that her cooperation would in no way harm her career prospects or cause problems with colleagues.
The next day, Paul went again to meet with the Kroll operatives. They reported that they had spoken with Kmart’s executive vice president and general counsel, Anthony Palizzi, who had given his assurance that her undercover work would never cause her any grief.
That was enough for Paul. OK, she said, I’ll help you.
Paul would communicate almost daily with the Kroll men over the next four months, providing details of her observations of the workplace and her peers.
Her secret mission paid off during the annual Comdex tradeshow in Las Vegas. A vendor gave Paul and a colleague each thousands of dollars worth of gambling chips. Paul says she tried to give them back, but the vendor refused. She’s no gambler — couldn’t grasp games more complicated than blackjack. But she placed bets for appearance’s sake, then excused herself to call her handler from Kroll. She was told to keep the chips, which she eventually handed over to the investigator.
During a subsequent phone call recorded by Kroll, Paul got the vendor to admit that he had bestowed the chips.
Her Kmart colleague, only recently hired, had allegedly kept his chips. He was fired in late December.
Kmart managers apparently believed they had made their point, and the Kroll investigators told Paul her mission was complete. Her informant role ceased on Jan. 3, 1997.
But her troubles were just beginning. Despite assurances of confidentiality, Paul would learn that her divisional vice president, Ed Hearne, knew of her relationship with Kroll from the beginning. Hearne would testify to that fact.
Paul claims she began to notice an unwelcome change in atmosphere at Kmart headquarters. She got the cold shoulder everywhere she turned.
A new buyer arrived from bankrupt Montgomery Ward to supervise Paul and, Paul claims, immediately asked if she intended to seek work at another company. Paul thought the query was unprofessional — to say nothing of ominous — and said so.
But it was Paul who was deemed unprofessional. She received a “corrective action” write-up two months to the day after she had agreed to assist Kroll. Ed Hearne then interviewed managers with whom Paul worked and asked them about Paul’s performance.
Paul’s worst fears were coming to pass. She was heartsick. Doctors agreed that the stress was making her physically ill. She fretted for her future, and the more the pressure built, the more distracted she became.
She told the Kroll agents what was happening. They assured her they would intervene with Kmart executives on her behalf. If they did, their plaints apparently fell on deaf ears.
Against her wishes, Kmart abruptly transferred Paul from the glitzy, high-tech home electronics division to the Siberia of the buyers’ world: women’s wear — maternity and plus sizes. She says she was told that if she refused the transfer, she’d be fired.
She tried to grit her teeth and do her job, but her emotions overwhelmed her.
The final straw was cast at her annual review, where she was given by far her poorest evaluation ever and chastised for not being a “team player.” For the first time in her years at Kmart, she got no annual raise.
She was devastated as she walked out of Kmart headquarters that day, April 15, 1997.
A doctor told her to take some time off work to soothe her frayed nerves, and to seek medical treatment and counseling.
So she took some time off from Kmart — forever.
Kathy Paul wouldn’t keep her job.
What she would keep, however, were detailed diaries, recorded during her time as an informant. There are three volumes in all, meticulously recorded in florid penmanship.
“Met for dinner with [a vendor], he wasn’t too happy with the casual restaurant I had chosen … states he would like to take me to more exclusive & expensive restaurants available in downtown Detroit. Also wanted to know what kind of house I preferred.”
—Kathy Paul Diary, Volume I
Kmart filed for Chapter 11 bankruptcy protection on Jan. 22, listing an untenable debt of $10 billion. It is the largest retail bankruptcy in U.S. history.
Kathy Paul, who describes herself as a devout Christian, found no joy in the news. Yet she couldn’t help feeling a twinge of vindication. She thought a malignant corporate culture was to blame.
Former employees interviewed by Metro Times say the workplace at Kmart changed markedly after Wal-Mart surpassed Kmart as the leading retail discounter around 1990. Out of desperation, they say, Kmart began replacing career managers with outsiders.
When the bankruptcy was officially announced, Paul says, “I felt that finally Kmart’s true colors were coming out, and that if they had behaved in an ethical manner in all things, maybe this bankruptcy wouldn’t have happened. At the same time, I sympathized with the ethical and dedicated people who worked there, and there were a lot of them.”
She’d often been baffled by the behavior of her fellow buyers. Some didn’t want subordinates to attend meetings with vendors, she says. Others complained about underlings opening mail from vendors.
She claims that inferior products were sometimes purchased because a vendor was a chum of a buyer. Prices that buyers agreed upon were often too high.
At best, it was incompetence. At worst, it was something more sinister.
It would be a stretch to attribute Kmart’s financial denouement to dubious buying. Kmart has been roundly criticized for trying to compete head-to-head with Wal-Mart. Its marketing program and finances were a mess, and analysts cited intractable product-distribution problems.
But the importance of buyers to a large retail organization cannot be overstated.
“Buyers are the critical link in the whole organization,” says Gary Hoover, author of the book Hoover’s Vision: Original Thinking for Business Success and an expert on retail, small business and entrepeneurial trends. “Buyers have a tremendous amount of power. They can make or break factories” that supply retailers.
Eric Beder, a retailing analyst for the investment bank Ladenburg, Thalmann & Co., calls the buying department “the lifeblood of a retailer. It’s more important than the finance department for a retailer. If you don’t make sales, you don’t need a finance department.”
Buyers, Beder says, distinguish a company.
Beder and Hoover agree that some vendors are willing and able to ply buyers with special favors in an effort to get an advantage over a competitor.
“The temptation is always there,” Beder says. “The buyer is given a set amount of money to spend on a product, and the company says we trust your judgment to make the selection.”
Hoover notes that in the buying environment, “There’s also a lot of potential for screwing with the records,” enabling buyers to inflate invoices and pocket kickbacks from vendors.
Such shenanigans are seldom detected.
“Nobody sees that lake property you’ve got.”
“There’s a lot of opportunity,” says Hoover, who once worked as a retail buyer himself. “Somewhere between 92 percent and 99 percent of buyers are honest. For a lot of people who steal, I think it’s the thrill of getting by with it.”
“The question is, how do you catch and stop it? It’s very difficult.”
Kmart tried to catch it and stop it by retaining Kroll Asssociates in February 1996. Kmart hired Kroll after a pair of scandals rocked the headquarters in Troy. In one case, Kmart’s head of shopping centers was sentenced to six months in prison and ordered to pay $500,000 in penalties after he was convicted of taking the bribes to approve $170 million in business deals between Kmart and a Chicago real estate broker.
In the other, a man in Kmart’s real estate department was accused of money laundering, fraud and insider trading with a Houston, Texas, broker.
Kroll’s retainer agreement with Kmart indicates the investigators were to determine how such nefarious behavior could occur. The agreement also referred to Kroll’s charge to investigate “certain allegations of misconduct in purchasing at Kmart.”
The retainer pact indicates that Dan Karson, Kroll’s managing director on the case, earned $250 per hour, and all other investigators earned $187.50 per hour.
The investigator Kathy Paul worked most closely with was Nick Proto, a former New York City Police Department white-collar crime detective.
Kroll’s invoice for services rendered over one six-week period amounted to $339,050. Another for a nine-day period was $134,075.
In April 1996, three months after hiring Kroll, Kmart announced with much fanfare that it would require its workers and vendors to sign an “integrity pledge” — a promise not to bribe each other or exchange gifts. Industry analysts agreed that involving vendors was an extraordinary step.
“During initial conversation [a vendor] wanted to know if I liked to golf. I said I was so-so at it. [Another vendor] then immediately presented [the] Kmart form letter that had been sent to vendors explaining the code of ethics. He wanted to know what to do with it. I said sign.”
—Kathy Paul Diary, Volume I
Kathy Paul, once an overachiever who ascended the ranks through sheer force of determination, has not had a steady job for five years.
Her first paying job after she left Kmart was as a dishwasher in a restaurant. She has tried to find jobs in her field of expertise, to no avail. She is currently accepting assignments from a temp agency, earning far less than she did at Kmart.
Her experience at Kmart battered her confidence, her emotional foundation and even her physical health.
Michael J. Abramsky, a Birmingham psychologist who examined her, characterized her in his report as “a compulsive individual which probably made her a good worker. She is meticulous, organized, pushes herself and always tries to be a good worker. However ... such individuals are somewhat rigid and inflexible and when they encounter stressors in their life and especially situations that they cannot control, they are prone to become symptomatic.”
Paul certainly had — and has — symptoms, including anxiety, depression and insomnia. She gained weight. Her hair began to fall out.
“My final diagnosis is anxiety/depression with symptoms of post traumatic stress disorder,” Abramsky concluded in December 1999, some 30 months after Paul had left Kmart. “From the information gathered, these symptoms were proximately caused by her circumstances at work. … Prognosis is guarded to poor.”
Though she had been transferred to women’s wear in March 1997, her old boss from electronics, Ed Hearne, conducted her review for her 1996 performance on April 15, 1997. Hearne, who no longer works for Kmart, could not be reached for comment.
In annual reviews, Kmart grades employees on a scale of 0 to 5, with 5 being the best. From 1990 through 1995, Paul’s scores ranged from a high of 4.07 to a low of 3.23.
Her 1996 performance grade was 2.21.
Paul’s own accounting indicates that during 1996 the two product sectors she was directly responsible for saw a $7.5 million increase in sales, a $2.7 million increase in profit and an $8.1 million decrease in inventory.
Paul, who grew up near Eight Mile and Kelly in Detroit, actually worked for Kmart in two stints. She first started in 1974 at a Kresge store, where she worked behind the food counter. After graduating from high school in 1976, she got an assignment in the Kmart treasurer’s office at the headquarters in Troy. She worked there while getting an associate’s degree from a junior college.
She went into the ladies-wear management program and worked to help organize and open new Kmart stores. She got her own store as ladies-wear manager.
She was married in 1981 to a fellow Kmart employee. The couple moved to Columbus, Ohio, where he worked for Kmart. But he was angling for a transfer back to the Detroit area, so Paul moved back and went to work for two women’s-wear stores in succession. Her husband rejoined her in Michigan, and Christian was born in 1983. When she returned to the workforce after her maternity leave it was in the business office of a hospital.
She landed back at Kmart again in 1984, this time in the workers’ compensation area of the legal office. She and her husband were divorced in 1985.
She moved back into merchandising as a planner in 1989, and worked her way up from there to the co-buyer position.
Next to raising Christian, Paul’s job at Kmart was the most important aspect of her existence. When her career at Kmart came unraveled, so did she.
She went on medical leave, then disability, after the annual review. Her doctors advised her not to return to work at Kmart, and when she failed to return after a year, she was terminated, per Kmart policy.
“Why would I want to go back to a place of that nature, that’s done that to me?” Paul asks.
She was an empty vessel. She lacked the confidence to work anywhere. Even volunteering at Christian’s school — a common occurrence in happier days — was a tribulation.
She had been prescribed a succession of antidepressants, and spent most of her time in her Clarkston home, watching TV. She ignored housekeeping duties and began to feel guilty about her relationship with her son.
“In the beginning she wasn’t that adamant about what was going on,” says Christian Paul, now 19. “She wouldn’t explain much. She seemed quieter and distant.
“Then she told me some things about it. I felt what happened to her was wrong.
“I tried to help her any way I could. I worked a lot to help her with some of the bills. I tried to be there for her.
“I grew up a lot quicker than most kids my age. I worked when I was 15.
“It gave me insight into how big businesses are,” he concludes.
Perhaps that insight has inspired him in his studies — pre-law and psychology at the University of Detroit Mercy.
Kathy Paul was not without her advocates at Kmart headquarters.
“When she worked for me she was a hardworking person and did everything that was requested of her and did her homework,” says one manager who spoke on condition of anonymity.
“But she was not popular with some of her peers. She just didn’t play politics.”
Paul tried to do things by the book, and she wasn’t shy about speaking up when she thought the rules were bent.
According to her diary, one outside vendor confided to Paul that her peers had branded her “a maverick.”
One of her supervisors who was transferred to another post advised in a parting e-mail, “Don’t let anyone get you down … Remember, there is a game to be played here and if you play it well there is greater opportunity for you out there. You’ll need to bite your ‘hot-blooded Italian tongue’ but BE NICE!!!! AND KEEP YOUR HEART.”
Former Kmart buyer Gene Rutkowski worked with Paul when she was a planner, one step below co-buyer. As planner, Paul monitored inventory and made sure that the products Rutkowski purchased would be distributed properly to stores.
“She did well,” Rutkowski says of Paul. “She had good technical and analytical skills. She was cooperative and productive.
“What happened to her sounds like normal routine over there [Kmart headquarters]. I don’t think she’s the only one. I think it’s happened to a lot of people. I could tell you a lot of horror stories.”
Rutkowski admittedly is no fan of Kmart. The firm fired him in 1995 after 31 years of service.
“I had an impeccable record,” he says. “I beat all the profit records. I got extra bonuses all through my career … out of the blue, they just fired me for reduction in workforce.
“There was nobody you could talk to over there. Everybody was out for themselves. … The new people they brought in played everybody off against each other. That’s the way the company started to fall apart.”
He considered suing Kmart, but instead took his pension — which he claims Kmart reduced by 57 percent — and became an investor. He says he’s done well.
As for Kmart, he says, the bankruptcy was unnecessary but poetically just.
“I think they just ended up with a den of thieves and people were in it for the short haul — take what you can and screw everybody else,” Rutkowski says.
11-25-96. Spoke to [Kroll managing director] Dan Karson regarding [Las Vegas vendor] and chips. Dan Karson states I need to make contact soon with [vendor]. I told Dan Karson okay, that I do need to make a business call to [the vendor]. We arrange call. I called [vendor] discussed feb business possibilities & need to review proposal from Comdex show. I also thanked [vendor] for the dinner and chips. … [Vendor] states CES show will have to go & get our money back. [Vendor] also states that he is sending… some leather jackets from the Luxor Hotel. … Spoke to Dan Karson after [vendor] call. States perfect. Conversation went very well.
—Kathy Paul Diary, Volume II
Even in her bewildered state, Kathy Paul had the pugnacity to sue Kmart for wrongful discharge.
She claimed fraud and promissory estoppel. She also alleged that in forcing her out — “constructive discharge” is the term of art — Kmart had violated Michigan’s Whistleblower Protection Act (WPA).
No jury has heard any evidence in the case.
Oakland County Circuit Court Judge Denise Langford Morris granted Kmart’s motion for summary disposition and threw the case out Jan. 12, 2000.
Kmart’s attorneys argued that the WPA did not apply to Paul’s case because she had not reported wrongdoing to a public body, as the law proscribes, and nobody had ever been charged with an illegal act.
The fraud and false-promise claims were invalid, Kmart’s legal team said, because it was Kroll’s agents, not Kmart people, who promised Paul would not be retaliated against. Furthermore, they stated, she was an “at-will” employee, meaning that she could be fired at any time for any reason or no reason.
The judge bought it.
The ruling is astonishing in light of the fact that Anthony Palizzi, the Kmart executive vice president and general counsel, testified repeatedly during a deposition that he instructed Kroll’s agents to tell Paul that she would face no retribution because of her undercover work.
Palizzi testified: “Dan [Karson] said she’s helping us, and of course, that was great. I said that’s great that she’s helping us, assisting us in the investigation. And the subject of — you know, quote, protecting her if that became necessary came up, and I said, ‘Dan, you can tell her that her assistance in this investigation will not result in her — in any negative impact on her because she helped us.’ And I said, ‘By the same token — you know, we can’t guarantee her a job if her performance — you know, I mean she still has to do her job, but you can tell her that she will not have any negative ramifications if she helps us.’ That was important to the company that that be the case.”
The judge said that in essence Paul had no right to rely on pledges made by Kmart’s executive vice president and general counsel because they were conveyed through a third party.
Paul has appealed the circuit court ruling to the Michigan Court of Appeals.
The attorney representing Kmart in the appeal did not return a call seeking comment.
Mark Granzotto, the attorney representing Paul on appeal, contends Kmart does not dispute the facts as Paul has laid them out.
“There’s no denial of the central character of her case coming from Kmart,” Granzotto says.
Not so, says Kmart spokeswoman Julie Fracker.
“We certainly were disputing her claims,” Fracker says, adding, “We feel that we are vindicated” by the circuit court ruling. Fracker declined to comment further on specifics of the case or Paul’s employment at Kmart.
Jeffrey Burg, the attorney who filed Paul’s lawsuit, calls Langford Morris’ ruling “a lousy decision.”
Yet Paul thinks Burg should have done things differently. He named only Kmart, and not Kroll Associates, as a defendant. If he had sued Kroll, if only as a tactical maneuver, he might have driven a wedge between Kmart and its private eyes, perhaps eliciting testimony from Kroll favorable to Paul.
Burg says Paul asked him not to name Kroll as a defendant.
Paul denies this, saying she encouraged Burg to sue Kroll without actually naming her contacts from Kroll, Karson and Proto, as defendants.
Burg did not depose anyone from Kroll, either.
“I had a couple of discussions with Nick Proto,” Burg says, “and I did determine from those discussions that he was not going to be very helpful to Kathy. He was in one of those ‘I don’t know’ and ‘I’m not sure’ type of modes when I spoke to him.
“I also spoke to Dan Karson, who similarly was not going to add much from what I got from Palizzi.”
Granzotto says of the Kroll agents, “If we win the appeal, they’ve got to be deposed.”
It’s a big if.
The Court of Appeals heard oral arguments Jan. 17.
But both Granzotto and Paul say that one member of the three-judge appellate panel said of Kmart, “We can agree on the fact that this is terrible management.”
Still, proclamations of poor management provide no guarantee Paul will get any sympathy from the appeals court.
And five days after the appellate judges heard the arguments, Kmart filed for bankruptcy protection, effectively staying the case. It is uncertain when the appellate court will rule.
“I think this case should go back to the trial court,” says Granzotto, who has been arguing before the Court of Appeals for 20 years. “The big issue shouldn’t be these hokey legal issues, it should be whether her employment was made bad because she cooperated with this undercover investigation.”
10-30-96. Nick Proto again states Dan Karson will need to make contact with Ed Hearne. Nick Proto states to stay calm, not to worry, it [corrective action] was not the end of the world. “
—Kathy Paul Diary, Volume II
Anthony Palizzi, once Kmart’s top in-house attorney and the man who ultimately called the shots in the Kroll investigation, retired two years ago. He is now living in Tennessee.
Reached by phone, he recalls the Kathy Paul case. He says he believes Paul’s troubles with her superiors were due to her job performance, not because she served as an informant.
“I authorized her to be given assurance that no negative action would be taken against her, and to the best of my knowledge, none was,” Palizzi says. “If I had received any knowledge that it had, I would have done something about it. That was not the report I received. The report I received was that it was not working out for her, that she was on a medical leave.”
He never met or spoke with Paul, and she made no effort to contact him directly when she began to feel persecuted.
“I’m not sure I knew all the details,” Palizzi says, “but I can tell you that if somebody assists Kmart in an investigation I can guarantee that that employee would not be looked at by me or anybody in a responsible position as not being a ‘team player.’”
Nick Proto, the investigator who worked most closely with Paul, has left Kroll Associates. He is now vice president and chief investigator for the Federal Reserve Bank in New York.
“I’m outraged,” Proto says of Paul’s treatment.
“She did 100 percent. She did whatever she was asked to do and she reported in a timely fashion. I had no involvement with any decisions that were made by Kmart against her. I can only talk about how cooperative she was.
“I had a meeting with her attorneys at Kroll, and I pretty much laid out how I felt to them, which was supportive of her and appreciative of what she’d done “
With his experience investigating white-collar crime for the NYPD, Proto concedes that he has seen things turn ugly for informants before.
But he adds, “Generally, the people that were informants in the past were not the kind of people Kathy Paul is. She wasn’t of the criminal element.”
9-7-96. Conversation with Nick. Agreed to meet Thurs 5:30 p.m. to make appts. with accounts discussed. Serpico.
—Kathy Paul Diary, Volume IJeremy Voas is Metro Times' editor. E-mail him at [email protected]