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Monday
Jul282014

Walmart's wall of silence comes tumbling down

The veil of secrecy that the "old" Walmart drew over bribery allegations in Mexico since 2005 is falling apart. One reason is because the "new" Walmart has taken robust compliance initiatives and is more transparent. Another reason is because the Delaware Supreme Court is forcing the world's biggest retailer to open up about the past.
 
The court's unanimous opinion last week upholding a lower court discovery order in a shareholder action is a win for transparency, with more to come. Documents that Walmart has refused to produce for two years during the litigation must now be disclosed to the plaintiffs.

The opinion is already viewed as a landmark for discovery of records in cases of director and officer misconduct, sure to be studied by practitioners. 

In a tough, point-by-point decision, the Delaware supremes affirmed each ruling in Chancery Court Judge Strine’s order. Strine now sits on the Delaware Supreme Court but recused himself from Walmart's appeal.

Here are some of the Supreme Court's key rulings, in its own words, with a distinctive and firm tone:

Purpose of Suit – Investigation of all misconduct, not just board-level matters, may go forward, quoting Judge Strine: “I believe… That core information regarding the WalMex bribery, construction permitting situation and how it was handled within Walmart by high-level officers and directors, that information … is essentially central to plaintiff's request. That is the wrongdoing they’re dealing with, is did Walmart deal appropriately with that? Did Walmart have effective internal controls to address the situations like that and did it take appropriate remedial action when it was faced with that?” (p.15)
 
Officer Level Documents - "Moreover, Wal-Mart does not dispute the key officers were involved in the WalMex investigation. Accordingly officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted to Wal-Mart's directors and officers.” (p.15)
 
Relevant Dates for Production - September 1, 2005 to the present is the correct period. “Indeed, Wal-Mart’s privilege log confirms that responsive documents exist from September 2005 through at least May 2012.” (p. 18) (This period is a complete black box. Nothing is know about what happened, even though Walmart admits a multi-million dollar investigation of wrongdoing in India, China, Brazil and other locations. Why the investigation and what has it found? And, what about the company's financials - how could they be certified for SEC purposes by key directors and officers during 2005-12?)

Attorney-Client and Work-Product Privileges – In precedent setting rulings, the Delaware Supreme Court held that privileged documents must be produced if they are necessary and essential to a proper purpose: “The record reflects that [plaintiff's] proper purposes sought information regarding the handling of the WalMex Investigation, whether a cover-up took place, and what details were shared with the Wal-Mart Board.” (p. 27) Plaintiff’s have stated a “colorable claim” and there is “good cause” for making an exception to the privilege shield: “the allegations at issue implicate criminal conduct under the FCPA…” (p. 31)
 
Walmart’s Office of the General Counsel – After two years and during an appeal, the company still refused to produce documents “known to exist by … the Office of the General Counsel of Wal-Mart,” asserting the order was ambiguous (p. 19). The top court found it was not ambiguous.
 
Scope of Relief – The company argued that the request for documents was not narrowed with “rifled precision.” In another precedent-setting ruling, the Delaware Supreme Court offered clarification for this case and for future litigants: "‘Rifled precision’ is not a quantitative limitation on the stockholders right to obtain all documents that are necessary and essential to a proper purpose,” or as Judge Strine put it : “And in a situation like this, it's not like you're talking about a board minute or two." (p.38, emphasis in original)

What about Maritza Munich, a former Walmart lawyer and compliance officer who resigned abruptly during the investigation. What about her testimony and files, her team’s investigation files, and the audit files?
 
What about the Caremark revisions to guide boards in conflict with the C-suite, and whether boards can ignore their compliance officers?
 
And what about a board that ignores red flags, sides with senior management in shutting down an effective compliance investigation and retaliates against compliance officers?
 
The Delaware Supreme Court didn't reach these issues – yet. But the justices didn't rule against any of them either. The court deemed them premature and not ripe for rulings.

This case is now going into high gear, powered by the Supreme Court's emphatic affirmation of Judge Strine’s discovery orders and, more important, his view of what's at stake in this extraordinary case. The Delaware Supreme Court is now letting the facts come out as required by law, one balanced step at a time. Critical issues not decided yet could resurface in the next stages of the litigation, when plenary discovery is allowed, including depositions.
 
What then for Martiza Munich? A veteran Delaware court watcher believes the Supreme Court's decision last week will lead to her vindication. The Walmart opinion swept aside all of the obstacles to her testimony, including attorney-client privilege, relevance and scope. Her day in court may come soon, when she can finally tell her side of what happened.

My series of posts about Walmart in Delaware can be found here.

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Michael Scher is a senior editor of the FCPA Blog. He has over three decades of experience as a senior compliance officer and attorney for international transactions. He can be contacted here.