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Pension fund sues Walmart over bribery scandal
May 4th, 2012
WEST SACRAMENTO, Calif. – The nation's second-largest public pension fund is suing Walmart for breaching its fiduciary duty in connection with allegations that the retailer's Mexico subsidiary engaged in a bribery scheme and the company failed to properly investigate and disclose the matter.
On Thursday the California State Teachers' Retirement System (CalSTRS) filed a derivative action against Walmart in the Court of Chancery of the State of Delaware in Wilmington, Del., where the retailer is incorporated.
The suit claims that Walmart's top management and directors were alerted to evidence that Walmart de Mexico (Walmex) executives were involved in the payment of bribes to expedite the expansion of Walmart stores in Mexico. The action also charges that an internal probe of the matter by Walmart was conducted improperly and, despite evidence of corporate malfeasance in the Mexico unit, the company concluded the investigation.
News of the alleged bribery scheme and internal investigation, said to have occurred in 2005 and 2006, emerged late last month in an article by The New York Times.
"Over the ensuing five-and-a-half year period, the Walmart board and management made no public disclosure of the bribery allegations at Walmex, although nine members of the current board were also on the board or members of management during 2005-2006," the CalSTRS suit stated. "It was not until December 2011 when, upon learning that The New York Times was investigating these events, the company announced in an SEC filing that it had launched an internal investigation into whether 'certain matters' were in compliance with the FCPA [Foreign Corrupt Practices Act]. Nevertheless, the company filing advised investors, 'We do not believe that these matters will have a material adverse effect on our business.' "
Along with Walmart corporate, individuals named as defendants in the CalSTRS suit include current and former Walmart officers and directors, among them Mike Duke, Walmart's present chief executive officer and a board member; board member H. Lee Scott, the company's previous CEO; Eduardo Castro-Wright, former CEO of Walmex and current vice chairman of Walmart; and David Glass, a former Walmart CEO and board member.
"The board's prolonged failure to address detailed and credible allegations of criminal activity undertaken with the tacit or express consent of current and former senior corporate officials, and the complicity of the company's highest-level executives in shutting down any investigation into those allegations, is causing and will continue to cause the company
substantial harm," the CalSTRS suit said. "Even beyond the reputational damage and loss in market capitalization — Walmart's stock lost 8% of its value in the first three days after the publication of The New York Times article — the total cost to the company and shareholders of the possible FCPA penalties or other government fines, the potential civil litigation, and the now-inevitable scorched-earth investigations may well stretch into the billions of dollars.
"Through this action, plaintiffs seek redress for Walmart and its public shareholders for the harm caused to them by the board and certain executives of the company."
In a derivative action, a shareholder brings a lawsuit against the directors, executives and/or other shareholders of the corporation for an alleged failure by management — with the suing shareholder claiming to be acting on behalf of the corporation. The CalSTRS suit requests that damages resulting from any violations be awarded to Walmart and that the company reform and improve its corporate governance and internal processes.
According to published reports, the suit represents the first such action by a large institutional investor since the news of the Walmart bribery scandal came to light.
CalSTRS, with a portfolio valued at $153 billion as of March 31, 2012, is the largest teacher pension fund and second-largest public pension fund in the United States.