* Wal-Mart shares fall 4.7 pct, Walmex down 12 pct
* Allegations could hurt Wal-Mart expansion plans -analysts
* Lawmakers in U.S., Mexico call for investigation
By Jessica Wohl and Elinor Comlay
CHICAGO/MEXICO CITY, April 23 (Reuters) – Wal-Mart Stores
Inc lost $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, lawmakers in the United States and Mexico
called on authorities to investigate allegations in a New York
Times article that Wal-Mart de Mexico had engaged
in a campaign of bribery to build its business.
Legal and retail experts said the allegations, if true,
could violate the U.S. Foreign Corrupt Practices Act (FCPA) –
which forbids bribes to foreign government officials – and badly
hamper Wal-Mart and its management for years.
They also raised concerns about Wal-Mart Chief Executive
Mike Duke and former CEO Lee Scott who were among senior
executives allegedly aware of the situation. Scott still sits on
the company’s board.
Two Democratic U.S. lawmakers, Elijah Cummings and Henry
Waxman, said they were launching an investigation into the
matter and sent a letter to Duke requesting a meeting.
The Times report “raises significant questions about the
actions of top company officials in the United States who
reportedly tried to disregard substantial evidence of abuse,”
Cummings and Waxman said in a statement.
Shares of Wal-Mart de Mexico, which is 69 percent-owned by
Wal-Mart and known as Walmex, fell 12 percent to 37.89 pesos
($2.88). The drop wiped out a 12 percent year-to-date gain in
the second-most-weighted stock on Mexico’s IPC index.
Shares of Wal-Mart fell 4.7 percent to $59.54, wiping some
$10 billion off their market value. The stock is a component of
the Dow Jones industrials index, which ended 0.8 percent
lower.
“Entering additional countries is a cornerstone of
Wal-Mart’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 Wal-Mart following the release of the allegations.”
The New York Times reported on Saturday that a senior
Wal-Mart lawyer received an email 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, Wal-Mart sent investigators to
Mexico City and found a paper trail of suspect payments totaling
more than $24 million. But the company’s leaders shut down the
probe and did not notify U.S. or Mexican law enforcement
officials until after the newspaper informed Wal-Mart that it
was looking into the issue, the Times reported.
“FCPA cases are both extensive and expensive, including
penalties for individuals/entities for both anti-bribery and
accounting provisions,” said Deutsche Bank retail analyst
Charles Grom.
Wal-Mart said it was deeply concerned about the matter and
began an investigation into its FCPA compliance last fall. It
said it disclosed the probe to the U.S. Department of Justice
and the Securities and Exchange Commission, and declined to give
any more details or to make executives available for comment.
In a memo entitled “Integrity” sent to Wal-Mart employees
on Monday, Duke said the company takes compliance with FCPA
“very seriously, and we will not tolerate violations anywhere or
at any level of the company.” The memo included a link to
Wal-Mart’s global ethics office website and phone hotline.
“My firm expectation is that Walmart will always follow the
law, but my expectation also goes far beyond following the law.
We will do what’s right – not just what is legal – and our
actions will show the utmost integrity at all times,” he said.
EXPENSIVE AND EXTENSIVE
Two opposition left-wing senators in Mexico called for an
investigation, though prosecutors said they would do so only if
asked by the Ministry of Finance or Ministry of the Economy.
“If licenses were given out where they shouldn’t have been,
there’s fraud not only in the cities where that happened, but
also there could have been fiscal fraud,” Francisco Javier
Castellon of the Party of the Democratic Revolution (PRD) was
quoted as saying in the newspaper Rumbo de Mexico.
Leftist presidential candidate Andres Manuel Lopez Obrador
said on Sunday that the allegations showed the government was
“rotten,” and he expressed dismay that the case was so far only
being investigated outside Mexico.
Bribery and corruption are pervasive in Mexico, where the
justice system is weak and lower-level public sector workers
earn relatively low salaries. A study last year by Transparency
International showed that Mexican companies were perceived to be
the third-most likely behind those in China and Russia to pay
bribes abroad.
BMO Capital Markets analyst Wayne Hood said in a research
note that Wal-Mart’s growth could be hurt both domestically and
abroad. “Articles like this will be used against the company by
activists and competitors when it attempts to open stores in the
U.S. and abroad,” Hood wrote in a note on Monday.
But others said the share drop could actually provide a
buying opportunity, given that Wal-Mart shares had been trading
near a 52-week high on optimism over the recovery in its U.S.
business. Options market activity also suggested a bullish bias
on Wal-Mart stock.
Citigroup analysts said in a note that, after discussions
with Wal-Mart, it believed that the retailer would conduct a
“thorough and transparent” review and said any pressure on the
stock was “an enhanced buying opportunity.”
The California State Teachers’ Retirement System (CalSTRS),
which currently holds over 5.5 million shares of Wal-Mart
Stores, will continue to keep its exposure to the retail giant
“until we find out what happens,” CalSTRS’s director of
corporate governance, Anne Sheehan, told Reuters.
Some hedge fund managers said Walmex was the more attractive
target for short sellers. Walmex said on Monday it
does not believe the allegations will hurt its business.
“Wal-Mart is considered one of the best companies in terms
of transparency in Mexico, and that is why it was so hard-hit,”
said Jorge Lagunas, a portfolio manager at brokerage
Interacciones in Mexico City.
SHAREHOLDER LAWSUITS
Lawyers said Wal-Mart 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.
Wal-Mart 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 Wal-Mart for breaching or ignoring
their duties, and for the company to tighten internal controls.
Shareholders could also use the power of the ballot box. At
Wal-Mart’s June 1 annual meeting, they could vote out directors
they deem responsible for allowing the bribery, including the
four independent directors who comprise the audit committee.
($1 = 13.17 pesos)
(Additional reporting by Jonathan Stempel, Angela Moon and Sam
Forgione in New York, Doris Frankel in Chicago, Karey Wutkowski
in Washington, Tom Hals in Delaware, Rachel Uranga and Cyntia
Barrera in Mexico City, Writing by Tiffany Wu; editing by
Matthew Lewis)
