From Wal-Mart To Wall Street: Pricing The Scandal

A reader said:

'It's amazing to me that Wal-Mart stock is at a 12 year high.... I'm not sure what that means, bigger picture, but I'd love to hear some commentary.'

The stock market is a mysterious place. But here's our best guess.

The New York Times broke the story about Wal-Mart's alleged bribery in Mexico on a Saturday (April 21). The day before, Wal-Mart shares had  closed on the NYSE at $62.45. Over the next few trading days, the share price dropped to $57.36, reducing Wal-Mart's market cap by about $18 billion.

Wal-Mart is one of the world's best known brands. Bribery and cover-up allegations against such a familiar name were shocking. News coverage was initially intense, and commentary about potential consequences was dire -- and often way over cooked. Little of the early reporting about FCPA enforcement was nuanced. Uncertainty about Wal-Mart's future ruled. 

But it didn't take long for thoughtful journalists to bring some perspective and balance. When that happened, the panic drained from the market, replaced by relief ('fear and greed'). Even in a worst-case scenario, investors realized, Wal-Mart's overall losses for any proven violations of the FCPA wouldn't approach $18 billion, the amount investors had lopped off the company's market value.

The share price gradually rose over the next couple of weeks. By May 15, when it closed at $59.35, it had recovered 40% from the drop caused by the scandal.

What happened next was pure Wall Street. The City Wire explained it this way:

On May 17, Wal-Mart reported solid numbers for the first quarter of its fiscal year 2013, with net income up more than 9%, and U.S. same store sales up 2.6%. The per share earnings of $1.09 were ahead of the 98 cents in the same quarter of last year, and above Wall Street estimates.

Any concerns the investor community may have had about the Mexico bribery issue were overcome by the earnings report.

On May 17, Wal-Mart jumped to $61.25. It's been rising since then. Yesterday (May 30), the shares closed at $65.44, about 14% above the low following the NYT bribery story.

'[I]ntraday trading on Wednesday,' the City Wire said, 'reached $65.95, ahead of the 52-week high of $65.76.'

A Reply To The New Republic

The recent reporting about Wal-Mart's alleged misadventures in Mexico elicited some really wonderful commentary from a number of new sources. My two favorites came from The New Yorker and The Atlantic. I don’t agree with everything they said, but they were unmistakably thoughtful and well-researched, and both advanced the public debate about global graft and how to fight it.

An article in The New Republic by Steve LeVine stood out as well, but for the wrong reasons. It was thinly sourced and logically weak -- certainly not characteristics I normally associate with The New Republic in general, or with Steve LeVine in particular. I have long been a fan of his work. His investigative journalism concerning James Giffen, the oil industry, U.S. energy policy, and the challenges of FCPA enforcement has been outstanding. So, with LeVine's past achievements in mind, I turned to his offering in The New Republic. Perhaps my expectations were unreasonably high, which could account for some -- but not all -- of the disappointment that followed.  

LeVine's core thesis was that corporate America “yawned” at the allegations about Wal-mart's massive bribery in Mexico -- that U.S. corporations aren’t particularly concerned about violating the FCPA and “have little to fear from the law.” Really? For years I've been doing almost daily research into global corruption and enforcement. Yet I've never come across one piece of evidence to support LeVine's central claims.

He relied principally on a WSJ summary of a television interview with Warren Buffett. The Oracle of Omaha did express his view that “someone at larger corporations is always doing something wrong.” But Buffett then said “the company’s job is to get the issue corrected.”

That -- no matter how you judge slumbersome gestures -- was no yawn. Buffett's remark, I realized, couldn't possibly be cited as evidence of indifference to bribery or bribery violations. And when LeVine didn't come up with anyone else from corporate America who might have yawned, my disappointment grew.

LeVine also lost me with his claim that U.S. corporations have been growing progressively indifferent to the FCPA since about 2003 -- that companies subject to its jurisdiction are less concerned about the statute now than they were ten years ago. That is plainly wrong. Between 1977 (when the FCPA was enacted) and 2002, there was very little FCPA enforcement, and thus very little compliance. Today, however, we see lots of both -- ask anyone who regularly reads the FCPA Blog. And ask them if they've heard a single person even faintly intimate that corporations were more concerned about FCPA violations yesterday than they are now.

Steve LeVine, as always, made plenty of interesting and credible points in his New Republic article. But ultimately his "yawn" thesis was a house of cards that collapsed in the first light breeze.

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Andy Spalding is the senior editor of the FCPA Blog. He teaches international business law at the Chicago-Kent College of Law. Effective June 1, he’ll be an Assistant Professor at the University of Richmond School of Law.

Wal-Mart's Simple Lesson: Learn To Live With The FCPA

There's a reason why you don't see many of the biggest U.S.-based government contractors on the FCPA top ten list (e.g., Lockheed, General Dynamics, Raytheon, Northrup, Boeing, etc.). Not that they didn't struggle with compliance during the early years of enforcement, but they moved quickly to update their compliance and ethics programs once they saw the tide of FCPA enforcement turning. Then they moved on.

The allegations about Wal-Mart's massive bribery scandal in Mexico were shocking, not because of the bribery itself, but because of the reported cover-up, which was cartoonish and doomed to fail, and the company's embarrassingly weak compliance program.

What then is the real lesson of the Wal-Mart saga? That anti-bribery compliance is the way of the future and no amount of screaming by business groups is going to change that. Compliance may be challenging and may potentially result in the loss of business abroad, but it is now a way of life. Companies will either adapt or open their wallets to the U.S. government. That's the simple lesson the biggest government contractors learned years ago.

Coming from a procurement background in which new rules/regime shifts are quite common, I see any debate about whether the FCPA hurts American enterprise or reduces overseas corruption as noisy, but as ultimately having little impact on anti-bribery enforcement.

That's why it's time for commercial companies to learn what sophisticated government contractors have known for years -- update your compliance programs, train your employees, and move on.
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Jessica Tillipman is a contributing editor of the FCPA Blog. She's the Assistant Dean for Outside Placement and a Professorial Lecturer in Law at The George Washington University Law School. She also teaches an Anti-Corruption seminar that focuses on corruption control issues in government procurement.

Walmart's Latest FCPA Disclosure

Here's Walmart's entire FCPA disclosure from its Form 8-K filed with the SEC on May 17:

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The Audit Committee of the Company’s Board of Directors (the “Audit Committee”), which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries including Wal-Mart de México, S.A.B. de C.V. (“Walmex”) and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance programs through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the SEC.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also recently initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have recently been filed by several of the Company’s shareholders against it, its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict accurately at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigation and review. In addition, the Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting its internal investigation and review, and it cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company may also see ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen.

The Company is in the early stages of assessing and responding to the governmental investigations, the shareholder lawsuits, and its internal investigation and review are on-going. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.

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The full Form 8-K can be viewed here.

Focus on Latin America: Brazil at a Crossroads (Part One)

 Wal-mart reporting has shone a spotlight on endemic corruption in Latin America. But although Mexico now dominates the headlines, that country is neither Latin America’s biggest economy nor its most urgent corruption story. The country that finds itself at truly critical moment in its anti-corruption effort is Brazil.

So many of us have read, so many times, that although Brazil has never been a member of the OECD, it was among the original 1997 signatories to the OECD Convention on Combating Bribery. That’s true, but it’s misleading. Brazil’s implementing legislation of 2002 conspicuously lacked a legal principle that has elsewhere proven a cornerstone of anti-bribery enforcement: corporate liability. Brazil at present only holds natural persons liable; hardly surprising, then, that the statute lays dormant.

All of that might now change. And it might not. On May 23rd, a special committee of Brazil’s lower legislative house is scheduled to vote on bill no. 6826/2010, the Clean Company Act. It’s an omnibus white-collar crime bill, but three provisions are especially critical to the international anti-bribery movement. First, it establishes the liability of legal persons for overseas bribery. Brazilian law traditionally doesn’t recognize criminal liability for corporations (just as common law countries historically did not), so the bill is limited to civil and administrative liability (which is fully consistent with the OECD Convention). Second, the bill would create, for the first time, cooperation credit for voluntary disclosure. Though another foundational piece of effective anti-bribery enforcement, voluntary disclosure is now almost unheard of in Brazil. Third, the Clean Company Act would establish a new policy of considering at the penalty phase of enforcement whether a corporate defendant had a compliance program in place. Supporters hope this provision could stimulate the growth of Brazil’s now-fledgling compliance industry.

The devil is in the procedural details. The special committee's affirmative vote would advance the bill to Brazil’s Senate, unless a small voting bloc is then able to force a plenary session of the lower house. Word on the street is that voting for a plenary session would be a stall tactic, and a highly effective one; it could delay further consideration of the bill for many years, all but killing it.

In this highly divisive political season, here’s an issue where both sides can find true common ground. U.S. businesses should support the Brazilian bill because it helps put its South American competitors (against whom U.S. companies may sometimes struggle to compete in countries like Mexico) on a so-called “level playing field.” Just as obviously, corruption law advocates should likewise support this extension of meaningful anti-bribery law.  

But the May 23rd vote has implications well beyond Brazil, or Latin America, or even the Western Hemisphere. We’ll spend a couple posts discussing why. Stay tuned. 

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Andy Spalding is a contributing editor of the FCPA Blog. He teaches international business law at the Chicago-Kent College of Law. Effective June 1, he’ll be an Assistant Professor at the University of Richmond School of Law.