Wal-Mart Said to Be Subject of U.S. Criminal Probe

Wal-Mart Stores Inc. (WMT) is the subject of a U.S. Justice Department criminal investigation into allegations of bribery in its Mexican subsidiary, according to a person familiar with the probe.

The Justice Department is investigating potential criminal charges under the U.S. Foreign Corrupt Practices Act, according to the person familiar with the probe who wasn’t authorized to speak publicly about it. Wal-Mart is conducting its own review of allegations that its representatives paid local officials in Mexico to get stores opened faster in the early 2000s.

The investigations by the government and the company may prompt executive departures and U.S. penalties if it reveals senior managers didn’t take strong enough action, governance specialists said. The probes also may slow Wal-Mart’s expansion in Mexico and other markets.

“The penalties paid by companies in settling these types of FCPA investigations have grown significantly larger in recent years,” said Jeffrey Lehtman, a Washington-based partner with the law firm of Richards Kibbe & Orbe LLP. “Depending on the facts uncovered, companies like Wal-Mart can expect the penalties to be incredibly high.”

The bribery allegations were described in an April 21 New York Times story. In a December 2011 U.S. Securities and Exchange Commission filing, Wal-Mart said it was examining whether it was in compliance with the Foreign Corrupt Practices Act, without saying what region or time period was in question.

Photographer: Susana Gonzalez/Bloomberg

A Wal-Mart de Mexico store in the Toreo neighborhood of Mexico City. Close

A Wal-Mart de Mexico store in the Toreo neighborhood of Mexico City.

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Photographer: Susana Gonzalez/Bloomberg

A Wal-Mart de Mexico store in the Toreo neighborhood of Mexico City.

“It is an open question as to whether Wal-Mart’s prior disclosure would have allowed investors to understand the magnitude of potential exposure,” said Lehtman, whose firm handles Foreign Corrupt Practices Act cases.

‘Anti-Corruption Program’

Alisa Finelli, a Justice Department spokeswoman, declined to comment. John Nester, an SEC spokesman, declined to comment earlier yesterday on whether the agency plans to investigate the Wal-Mart allegations.

The company said in an April 21 statement that it has met voluntarily with the Justice Department and the SEC to discuss the case. The company is also enhancing its audit procedures and internal controls to escalate to management possible violations of the bribery law.

Jeff Gearhart, the company’s general counsel and corporate secretary, told employees in an April 21 memo that the alleged violations “occurred more than six years ago” and are “not a reflection of who we are or what we stand for.”

In a separate note sent to employees yesterday, Chief Executive Officer Mike Duke said Wal-Mart is conducting an “aggressive investigation” and “will not tolerate violations anywhere or at any level of the company.” David Tovar, a company spokesman, confirmed the authenticity of both documents.

Photographer: David Paul Morris/Bloomberg

Customers push shopping carts in front of a Wal- Mart Stores Inc. location in American Canyon, California, U.S. Close

Customers push shopping carts in front of a Wal- Mart Stores Inc. location in American... Read More

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Photographer: David Paul Morris/Bloomberg

Customers push shopping carts in front of a Wal- Mart Stores Inc. location in American Canyon, California, U.S.

Mexican Expansion

The expansion of Wal-Mart de Mexico, mainly in the last decade, left the world’s largest retailer with about 20 percent of its stores in Mexico, out of more than 10,000 worldwide. Bentonville, Arkansas-based Wal-Mart’s sales rose about 6 percent last year to $447 billion. Wal-Mart has more than doubled the number of stores in Mexico to 2,088 since 2008.

The investigation may slow Wal-Mart’s growth in the country if authorities there feel pressure to show more scrutiny of its permits, Robert Carroll, an analyst at UBS AG in New York, said yesterday in a report.

Wal-Mart de Mexico, which is 69 percent owned by Wal-Mart Stores Inc., fell 12 percent yesterday to 37.89 pesos in Mexico City, the biggest decline since May 4, 1998. The parent company’s shares slid 4.7 percent to $59.54 at the close in New York, the biggest drop since Aug. 10.

Conference Call

Walmex’s first-quarter net income rose 4.5 percent to 4.71 billion pesos ($357 million) from 4.5 billion a year earlier, the company said in a statement. Sales climbed 14 percent to 96.9 billion pesos, missing the average estimate of 99.7 billion pesos of five analysts polled by Bloomberg.

Walmex CEO Scot Rank and Chief Financial Officer Rafael Matute didn’t mention the corruption investigation yesterday on a seven-minute conference call to discuss first-quarter results. As usual, the company didn’t take questions from analysts or investors on the quarterly call.

Settlements involving the corrupt practices act are typically 1 percent to 2 percent of sales, and that would be about $4.5 billion per 1 percentage point of sales for Wal-Mart, Carroll said. FCPA investigations take 2 years to 6 years to settle, he said. The largest such settlement ever was $1.6 billion paid by Siemens AG (SIE) in 2008, he said.

Wal-Mart executives, including then-Chief Executive Officer and current board member Lee Scott, were made aware of the bribery allegations in 2005, the New York Times reported. So was Duke, the current CEO, who at the end of that year was just taking over international operations, the article said.

Scott didn’t return a phone call to his home.

Congressional Scrutiny

Two top Democrats on congressional panels yesterday moved to start a probe and request a meeting with Wal-Mart executives.

The Times report “raises serious questions about potential violations of United States law” and “about the actions of top company officials in the United States who reportedly tried to disregard substantial evidence of abuse,” Representatives Elijah Cummings of Maryland and Henry Waxman of California, wrote in a letter to Duke.

Cummings is the top Democrat on the House Oversight and Government Reform Committee, and Waxman is the top Democrat on the House Energy and Commerce Committee.

Wal-Mart will face pressure from shareholders to take action against any executives who didn’t act fully on the bribery allegations sooner, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

‘It’s Problematic’

“If this is all true, it’s problematic,” Elson said in a telephone interview. “If any officer was significantly involved, their position has to be reviewed. You have to do the investigating and determine what did the CEO know and when.”

The Times article said the bribes may have amounted to more than $24 million in payments.

The Times identified executive Eduardo Castro-Wright as a central figure in the expansion of the alleged payments. Castro- Wright ran Wal-Mart de Mexico as CEO from 2003 to 2005 and was president and chief operating officer of the unit from 2001 to 2003. Some of the alleged bribery took place during that time, the newspaper reported.

In a telephone interview, Tovar declined to discuss the future of Castro-Wright, who is now a Wal-Mart vice chairman scheduled to retire July 1.

To contact the reporters on this story: David Welch in Detroit at dwelch12@bloomberg.net; Thom Weidlich in New York at tweidlich@bloomberg.net; Seth Stern in Washington at sstern14@bloomberg.net

To contact the editors responsible for this story: Robin Ajello at rajello@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net

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