Wal-Mart Faces More Shareholder Litigation

New York City’s pension funds is the latest group of disgruntled Wal-Mart shareholders to file suit against the retail giant.

The Office of the New York City Comptroller and the New York City Law Department announced Monday (June 11) that the NYC pension funds filed a shareholder derivative action against Bentonville-based Wal-Mart Stores Inc. in Delaware Chancery Court.

The lawsuit concerns the recent allegations regarding the ongoing bribery scandal and cover-up at Wal-Mex, the Mexican subsidiary of Wal-Mart. The New York City funds held 5.6 million Wal-Mart shares as of March 31 and collectively oversee more than $121 billion in assets, according to the suit.

The complaint alleges that Wal-Mart’s officers and directors breached their fiduciary duty to the company and its shareholders by failing to properly handle credible claims of the bribery allegations and attempting to cover up details of the scandal.

“Wal-Mart’s board has repeatedly rebuffed our office and the New York City Pension Funds when we have raised concerns over the company’s failure to comply with legal and ethical standards,” comptroller John Liu said. “Rooting out the directors and executives responsible for the current crisis would be a first step, but Wal-Mart also needs corporate governance reforms and an independent board that will protect outside shareholders and safeguard against another breakdown of internal controls.”

The suit seeks to recover corporate assets lost as a result of any wrongful acts, as well as tighten legal and regulatory compliance protocol and improve governance oversight, according to Inga Van Eysden, chief of the New York City Law Department’s Pension Division.

The suit claims in 2005, Wal-Mart executives were notified of a scheme involving the bribing of Mexican officials to expedite the building of Wal-Mart stores in that country.  Several internal investigations resulted.

The Pension Funds allege that the company took no significant action to change the situation. On April 21, 2012, The New York Times published an article concerning the Mexican bribery scandal.  Wal-Mart’s stock quickly declined approximately

8% in the days that followed.

Based on these developments, Liu said the shareholders decided to commence their derivative action against 16 Wal-Mart directors and executives – current and former. Separate derivative cases against Wal-Mart are also pending in Delaware Chancery Court and the U.S. District Court in Arkansas.

While the litigation is mounting against Wal-Mart, the retailer’s shares continue to be on a stealth rally challenging 12-year highs, though down slightly on Monday closing down 1% at $67.54.

CNBC analyst, Courtney Reagan, said there is a divergence between headline risks and stock price gains.

“While investors are not happy about the allegations and subsequent costly investigation, as long as Wal-Mart’s financials remain fundamentally strong shareholder remain committed. Those everyday low prices are still translating into impressive gains,” Reagan said.

Only one major brokerage house has downgraded the company’s stock as a result of the ongoing investigation.

Wal-Mart officials said at the company’s recent shareholder meeting June 1, the investigation is independent and ongoing. Wal-Mart said that while it could not predict the outcome of the various suits, it did not believe that the outcome would have a material effect on its financial conditions or results of operations.

Patrick McKeever, senior analyst with MKM Partners, noted some surprise there hasn’t been more price fallout from the negative headlines and mounting lawsuits.

He said at the very minimum this lengthy investigation will divert top executive’s time away from their day-to-day roles and he doesn’t rate the shares a buy despite their show of resilience.

Monday’s suit follows a complaint by the California State Teachers' Retirement System, or CALSTRS, filed in Delaware Chancery Court in early May. At last count there have been 11 derivative complaints filed against the retail titan since the allegations were revealed in April.

Kim Souza with our content partner, The City Wire, is the author of this report. She can be reached by email at [email protected].