Wal-Mart Stores Inc lost US$10 billion of its market value on Monday on concerns that a bribery investigation in Mexico could be very costly and hinder its plans to grow.
In a sign that the problem was widening for the world’s largest retailer, two US lawmakers said they were launching their own investigation into allegations in a New York Times article that Wal-Mart de Mexico had engaged in a multi-year campaign of bribery to build its business. In Mexico, the front-running Mexican presidential candidate, Enrique Pena Nieto, and lawmakers also called on local authorities to investigate.
If the allegations are true, Walmart may have violated the US Foreign Corrupt Practices Act (FCPA), which forbids bribes to foreign government officials, as well as run afoul of Sarbanes-Oxley rules that require corporate gatekeepers to report material violations of securities laws.
Legal and retail experts also raised concerns about Walmart chief executive Mike Duke and former Walmart chief executive Lee Scott, who were among senior executives allegedly aware of the situation, according to the Times. Scott still sits on the company’s board.
Shares of Wal-Mart de Mexico, which is 69 percent-owned by Walmart and known as Walmex, fell 12 percent to 37.89 pesos. The drop wiped out a 12 percent year-to-date gain in the second-most-weighted stock on Mexico’s IPC index.
Shares of Walmart fell 4.7 percent to US$59.54, wiping about US$10 billion off their market value and more than erasing this year’s gains. The stock is a component of the Dow Jones industrials index, which ended 0.8 percent lower.
The news raised concerns that Walmart, the world’s largest retailer, might have trouble expanding into new markets.
“Entering additional countries is a cornerstone of Walmart’s growth strategy,” Consumer Edge Research analyst Faye Landes wrote in a research note. “We can foresee the authorities in some key countries, notably India, becoming dramatically less welcoming to Walmart following the release of the allegations.”
The New York Times reported on Saturday that a senior Walmart lawyer received an e-mail from a former Walmex executive in September 2005 that described how the Mexican company had paid bribes to obtain permits to build stores in the country.
According to the Times, Walmart sent investigators to Mexico City and found a paper trail of suspect payments totaling more than US$24 million. However, the company’s leaders shut down the probe and did not notify US or Mexican law enforcement officials until after the newspaper informed Walmart that it was looking into the issue, the Times reported.
A source familiar with the matter said the US Department of Justice has been conducting a criminal investigation into the bribery matter for months. In Mexico, Enrique Pena Nieto, the favorite candidate to succeed conservative Mexican President Felipe Calderon, joined some opposition lawmakers in calling for the government to launch an investigation. Mexican Attorney General Marisela Morales said her office would act promptly if asked to do so by the Mexican Ministry of Finance or Ministry of the Economy.
Lawyers said Walmart could face shareholder lawsuits accusing the company of securities fraud for having inflated its stock price by misleading investors about its FCPA compliance. Cosmetics maker Avon Products Inc faces similar lawsuits over its activities in China.
Walmart executives and directors, like their Avon counterparts, could face “derivative” lawsuits accusing them of covering up or turning a blind eye to the alleged bribes.
These lawsuits seek to force executives, or their insurers, to pay money directly to Walmart for breaching or ignoring their duties, and for the company to tighten internal controls.
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