Newswise — As details of the Walmart bribery scandal in Mexico plays out, the University of Maryland Francis King Carey School of Law offers expert sources for comment. Assistant Professors Urska Velikonja and Brian Sawers of the School's business law program have been following the Walmart case and have made the following statements…
Urska Velikonja:There’s no doubt that Walmart violated the FCPA. Top management's response to the discovery is surprising, considering that in 2005 Enron and WorldCom and other accounting scandals were still front-page news.
It's clear that corporate lawyers will have a field day, but so may securities lawyers. Walmart's failure to properly respond to the internal report that bribes were paid suggest additional securities violations. Securities laws do not require companies to self-report discovered criminal violations to authorities, though Organizational Sentencing Guidelines reward companies that self-report wrongdoing. Failure to disclose to their shareholders that a government investigation is likely is a violation of Regulation S-K. It is pretty clear that such an action was not likely in 2005 and 2006 when Walmart's top management learned of the bribes, and so no disclosure was necessary at the time. But failure to disclose uncharged criminal conduct may expose a public company to civil liability if nondisclosure makes other disclosures materially false and misleading, and nondisclosure is material and directly related to company's financial condition. Walmart de Mexico was the pride of Walmart corporate, and accounts for 20% of all Walmart stores worldwide, suggesting that failure to disclose corruption might make Walmart's disclosures materially misleading.
It also looks likely that the then-CEO H. Lee Scott Jr. will be a target of an SEC investigation. The Sarbanes-Oxley Act Section 404 requires management to establish and maintain an adequate system of internal controls and to certify that those controls are effective. As the NYT report indicated, Walmart hired an investigator in 2003 to look into Walmart de Mexico. The investigator found that Mexican internal audit and anticorruption units were ineffective and reported its findings to Walmart. Which did exactly nothing, and its management continued to certify that it was not aware of any deficiencies in internal controls.
Finally, Section 404(b) required Walmart's auditor, Ernst & Young (yes, the same Ernst & Young that failed to detect accounting fraud in Lehman Brothers), to attest that Walmart's internal controls were adequate. Ernst & Young complied, and we have no information as of yet that E & Y was aware of Walmart de Mexico's "business strategies." But any audit firm worth its dime should at least have asked pointed questions of any firm doing business in high corruption areas, such as Latin America, Russia, etc.
Brian Sawers:I can see several [securities] violations. First, the SEC has taken the position that bribery is qualitatively material, even if the amount in question is not quantitatively material. Secondly, Sarbanes-Oxley requires officers to certify some filings, which may be an issue. I think it is too early to know whether Walmart or its officers broke the securities laws.
But, based on the NY Times report, I think the Walmart board and its officers violated their fiduciary duties. Walmart is a Delaware corporation and In Re Caremark interprets the duty of care to require corporations to implement robust internal controls to prevent and detect lawbreaking."
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