Posted 12/9/2013 12:00 am
Updated 8 months ago
Wal-Mart Stores Inc. has projected it will have spent more than $400 million by the end of its fiscal year in January for investigations and global compliance programs that stemmed from a Mexican bribery scandal.
By the time the lawsuits by angry shareholders and investigations by the Department of Justice and the Securities & Exchange Commission are over, the Bentonville retailer could have spent hundreds of millions more.
Currently, the lawsuits are slowly making their way through the courts.
The California State Teachers’ Retirement System and two other pension funds have been named as lead plaintiffs in a 2012 lawsuit against Wal-Mart and its directors for alleged violations of the Foreign Corrupt Practices Act.
A question about which documents could be released to shareholders is on appeal at the Delaware Supreme Court.
Attorney John Emerson of Houston is watching that case closely. Emerson is one of several attorneys who sued Wal-Mart and members of its board of directors in U.S. District Court in Texarkana in 2012. But that case was stayed pending the outcome of the Delaware case, which hasn’t seen much progress.
“Here we are more than a year later, and [the Delaware case] is no more advanced than we are,” Emerson told Arkansas Business last week.
He has appealed the motion to stay and a ruling isn’t expected from the U.S. Court of Appeals for the 8th Circuit until the spring.
Meanwhile, Wal-Mart is concerned about an investigation by the DOJ and SEC over alleged violations in connection with the FCPA. If the DOJ and SEC decide to bring charges, Wal-Mart could face criminal convictions or fines, according to the company’s SEC filings.
Since 2007, companies that have violated the FCPA have paid millions of dollars in fines.
In 2010, 23 companies paid a total of $1.8 billion in fines to the DOJ and SEC for FCPA violations, according to a 2012 report titled “Double Trouble: Collateral Shareholder Litigation Following Foreign Corrupt Practices Act Investigations,” by Amy Westbrook, a professor of law at Washburn University School of Law in Topeka, Kan. In 2011, 16 companies paid more than $508 million in fines, the report said. But in 2012, only eight companies agreed to pay more than $152 million in penalties, according to news releases from the DOJ.
Wal-Mart doesn’t have a timetable for when its investigation will end, company spokesman Randy Hargrove said last week.
“So it would be inappropriate to comment further on any of the allegations or for us to come to any conclusions until that investigation is finished,” he said.
In its quarterly filing with the SEC for the second quarter that ended July 31, Wal-Mart said it “is probable that [Wal-Mart] will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations.”
Wal-Mart said it couldn’t estimate a loss in connection with the investigation.
In SEC filings, Wal-Mart said it told federal agencies in November 2011 about an internal investigation into allegations involving bribery by company officials working in Mexico. But it wasn’t until The New York Times published details of the allegations in April 2012 that the scandal became widely known.
The Times’ article said that Wal-Mart’s Mexican division paid more than $24 million in bribes so stores could be opened faster than if the company had followed normal government procedures.
Wal-Mex “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville,” the article said.
The story also said the company learned of the allegations in 2005 but didn’t follow up on them.
The article became the basis for several lawsuits filed by shareholders who brought derivative suits against Wal-Mart and its board members. In a derivative lawsuit, shareholders sue on behalf of the company. If investors win, the board members will be responsible for paying the judgment and the money will go to the company, not the plaintiffs. The plaintiffs, though, benefit because the company will have increased in value.
On April 25, 2012, Wal-Mart shareholder John Cottrell of Texas, acting on behalf of Wal-Mart, sued Wal-Mart CEO Michael Duke and other board members over allegations that included breach of fiduciary duty of loyalty, which requires that the board members act in good faith to protect the best interests of Wal-Mart and its shareholders.
The lawsuit also charged that Wal-Mart knew about the alleged illegal practices for years but ignored them and covered them up. The lawsuit said Wal-Mart’s goodwill and corporate image had been damaged.
Five other shareholder derivative lawsuits were consolidated into that case.
Only days later, the California State Teachers’ Retirement System filed a lawsuit in the Delaware Court of Chancery with similar allegations of wrongdoing tied to the bribery scandal. Seven derivative actions were consolidated into the lawsuit.
Meanwhile, in the Texarkana case, one of Wal-Mart’s attorneys, Jonathan Dickey of New York, asked that the case be stayed while the lawsuit in Delaware makes its way through the courts.
The cases “involve substantially the same claims and substantially the same issues,” Dickey said in a September 2012 hearing before U.S. District Judge Susan Hickey in El Dorado.
Attorney Corey McGaha of Little Rock, who is one of the attorneys representing the plaintiff Cottrell, said during the hearing that the case should remain in federal court because he raised claims that can’t be settled in state court.
He also pointed out that it wasn’t unusual for two shareholder derivative cases to proceed in two different courts at the same time.
“What we have is this bribery scandal that’s an important event in Wal-Mart’s history,” McGaha said at the hearing. “And [Wal-Mart’s attorneys] are coming here to tell you that that shouldn’t be adjudicated in an Arkansas federal court where Wal-Mart essentially was born, and where it grew up; where the documents are going to be.”
But Hickey wasn’t persuaded to allow the case to move forward in federal court.
“The claims and parties in this action and the Delaware action are almost identical, and the issues involved overlap substantially,” she wrote in her order on Nov. 20, 2012.
She ordered that the federal case be stayed pending the outcome of the Delaware court case, which she said was “moving forward.”
But the Delaware case has made little progress. In October, a Delaware judge ruled on which Wal-Mart documents could be released to the shareholders for their lawsuit.
Wal-Mart’s spokesman Hargrove said both Wal-Mart and the plaintiffs have appealed the ruling to the Delaware Supreme Court. Wal-Mart wants to release fewer documents and the plaintiffs want more.
Emerson, the attorney in the federal court case, said it could take another year to get a ruling from the high court in Delaware. And then it might take another year after that to get the case through the court system.
As the cases and investigations drag on, Wal-Mart’s costs are rising.
It said it spent $157 million during the fiscal year that ended Jan. 31, 2013, in connection with FCPA matters. And through the first three quarters of this year, the company spent another $224 million. Of that amount, $135 million was for the “ongoing inquiries and investigations,” according to its SEC filings. The rest of the money went for global compliance programs and organizational enhancements.
Wal-Mart said in its Nov. 14 earnings call, a transcript of which was posted to its website, that the company expects to spend between $75 million and $80 million on FCPA matters in its fourth quarter alone.
For its global compliance programs, Wal-Mart said on its website that it is “addressing 14 compliance subject matters” in every market, including anti-corruption, food safety, anti-money laundering, antitrust and environment. Wal-Mart also said it has hired chief compliance officers and anti-corruption directors and a staff to go with them in each market and region.
Wal-Mart “is taking a systematic approach to improve FCPA compliance in every market in which it operates, drawing on corporate best practices that will help enhance, over time, an FCPA compliance program that will make Walmart an even better company,” the company said on its website.