The price-tag Wal-Mart Stores may pay for alleged violations of the Foreign Corrupt Practices Act just went higher than the $858 million the retailer will have spent by the end of fiscal 2017 defending itself during the past five years.
U.S. District Judge Kathy Hickey from the Western District of Arkansas recently granted class-action status for investor plaintiff City of Pontiac General Employees Retirement System that claimed the retail giant violated the Securities Exchange Act of 1934 by not properly disclosing the investigation in required federal filings in a timely fashion. This ruling gives the case the ability to continue.
Wal-Mart had previously argued for dismissal of the pension fund’s claims citing there was no related financial loss for the investor.
“This was a procedural ruling that has nothing to do with the merits of the case. We continue to believe the claims here are not appropriate for class certification. We’re considering our options, including seeking an appeal,” according to a statement provided by Walmart spokesman Randy Hargrove.
Hickey disagreed citing in the order: ”Judicial economy and the best interests of the class members favor class certification.” She said the investors did demonstrate loss using an alternative accounting method which is acceptable to the court. Hickey certified the class period from Dec. 8, 2011 to April 20, 2012, which is the period of time between when Wal-Mart self-reported the alleged violations and the day before the news was made public by The New York Times.
FCPA expert Mike Koehler, who spent 10 years as a FCPA lawyer and now teaches law at Southern Illinois University, said Wal-Mart first disclosed its FCPA scrutiny in December 2011, which was long before the April 2012 New York Times article.
“Publicly-traded companies, generally speaking, have an obligation to disclose ‘material’ information. Whether Wal-Mart should have disclosed the potential FCPA issues prior to when it did, thus depends on whether the information was ‘material.’ This issue, among others, will be the focus as the cases proceeds,” Koehler told Talk Business & Politics.
While many companies might fold up under an $858 million expense since fiscal 2013, Wal-Mart’s balance sheet remains strong with net free cash flow of $10.312 billion reported as of Aug. 18, 2016. Net profits for the consolidated company totaled more than $6.852 billion through the first half of this year. And while any settlement Wal-Mart might have in this lengthly FCPA probe is going to be stout, experts don’t think it will make a big dent in Wal-Mart’s growing profits.
With regard to the recent class-action status ruling by Judge Hickey, Koehler said civil litigation in the aftermath of FCPA scrutiny or enforcement is a common occurrence. Koehler said claims like those made recently by the Michigan Pension Fund may only rarely get past the motion to dismiss stage.
He cited another legal action against Wal-Mart and individuals officers made by other investors which was recently dismissed by the 8th Circuit Court of Appeals. He agreed that the ruling this week out of Arkansas was merely a procedural ruling by the court and it doesn’t go to the substance or underlying merit of the plaintiffs’ allegations.
Last year, Wal-Mart said the majority of its $126 million FCPA expenses ($121 million) went toward legal expenses for the ongoing investigations and the remaining $5 million was spent on internal compliance protocol. In the year prior, Wal-Mart also spent $121 million of the $173 million on lawyers and legal help involving the probe. So it’s responsible to think the bulk of the $858 million FCPA-related costs are directly linked to legal representation in defense of the violation claims that now span multiple counties.
Koehler also has said he expects the conclusion on Wal-Mart’s FCPA probe to wind down sometime next year. Two to four years is the normal time for a typical investigation, according to Koehler. And while the Wal-Mart case is on the outer limits of that, it’s not uncommon for a complex case to last five or six years, he added.
Since the FCPA investigation first became public, Wal-Mart execs have vowed to investigate the allegations and deal swiftly with any individual who might be implicated. Koehler credits Wal-Mart with doing lots of things right, namely investing heavily in its own internal compliance program to build a stronger firewall around the business. He said the types of remedial acts are viewed positively when the settlement is negotiated. Should Wal-Mart admit to violations in its future settlement with the Department of Justice, other shareholder litigation could follow.