DETROIT (AP) _ After testimony from just two government witnesses, federal prosecutors heard enough to realize that they likely couldn't prove their case against two former Kmart executives accused of conspiring to inflate the retailer's earnings.

At the government's request, a federal judge on Friday dismissed charges against Enio A. ``Tony'' Montini Jr. and Joseph Hofmeister, who were accused of securities fraud and making false statements to the Securities and Exchange Commission.

``In light of the testimony and evidence to date, the government believes that it is more likely than not that the evidence will not sustain a conviction,'' prosecutors said in their motion seeking dismissal.

The trial stemmed from a federal probe into Kmart's decline into bankruptcy. Since Enron Corp. collapsed in bankruptcy two years ago, a government crackdown on corporate fraud has brought indictments at WorldCom, Tyco and other companies.

U.S. Attorney Jeffrey Collins said the investigation into Kmart's bankruptcy is continuing. No other charges have been brought.

``Today the government acknowledges that ... there is no case,'' Hofmeister's lawyers said in a statement issued on his behalf. ``We fully support the government's decision to do the right thing here by dismissing all charges.''

The government claimed Montini and Hofmeister helped Kmart meet Wall Street's earnings expectations during the second quarter of 2001 _ boosting its earnings by 6 cents a share _ by leading the company to improperly record a $42.3 million payment from vendor American Greetings Inc.

During opening statements Monday, Justice Department attorney Billy Jacobson described Montini and Hofmeister as engaging in a conspiracy of lies and deceit _ misleading their colleagues, the company and the public to make themselves look better.

But Jonathan Graham, a lawyer for Montini, said testimony from key government witness Susan Pifer, a former vice president for finance at Kmart, didn't hold up. In court, she acknowledged discrepancies between her testimony and what she told investigators and a grand jury about the men's role in Kmart's finances.

``The crucible of cross-examination, in front of a jury, of the government's star witness exposed her as a liar, and we are grateful that the government took the only honorable course and dismissed the case,'' Graham said.

Hofmeister, 53, worked for Kmart since 1972 _ most recently as a divisional vice president of merchandising. Montini, 51, joined Kmart in 2000 and was a senior vice president and general merchandise manager of Kmart's drug store division.

Both were let go in 2002 as part of an effort to streamline the company's senior-level management.

Kmart Corp. closed nearly 600 stores and shed 57,000 employees after filing for bankruptcy protection in January 2002. It emerged from bankruptcy in May as Kmart Holding Corp. Company officials say it will return to profitability next year.

``Kmart Holding Corp. continues to fully cooperate with federal investigations,'' spokesman Jack Ferry said. ``It would be inappropriate for the company to comment on the outcome of the trial of former executives of the predecessor company.''

The case represented the first criminal charges from the federal probe into Kmart's finances. But the company's eventual decline was only given veiled mention at trial because of a ruling by U.S. District Judge Paul Borman, who granted a defense motion to exclude references to the bankruptcy.

When the two were indicted in February, securities experts said the charges could be a stepping stone in a government effort to pursue higher-up executives. But no other indictments have come.

``I was a little surprised that other executives have not been prosecuted,'' said Joe Whall, founder of Whall Group, a forensic accounting firm. ``I don't know if the investigative process has been faulty or if there's substance lacking in the investigation.''

Montini and Hofmeister had faced a maximum sentence of 10 years in prison and a $1 million fine on the securities fraud charge. A conspiracy charge and the false statements charge carried a maximum penalties of five years in prison and a $250,000 fine.

The SEC has filed a civil accounting fraud action against Montini and Hofmeister, seeking to bar them from serving as officers or directors for publicly traded companies. That case could continue, since it requires a lower standard of proof.

``We're going to have to evaluate the evidence and review the matter and decide what we are going to do,'' said Thomas C. Newkirk, the SEC's associate director of enforcement.

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