Wal-Mart Shares Drop After Bribery Scandal Revealed

Gabrielle Karol
Posted

The setting: Mexico.
The players: executives of a major multinational corporation.
The drama: $24 million in bribes paid to Mexican government officials.

While this sounds like a summary of a new Matt Damon thriller … it’s actually the key facts of a scandal that’s threatening to shake Wal-Mart to its core.

Over the weekend, The New York Times dropped a bombshell: For years, Wal-Mart officials had been bribing Mexican officials to quickly grow the Wal-Mart chain in the country (one in every five Wal-Mart stores is now in Mexico). What’s worse, the company knew about the bribes–and had been trying to cover up the scandal since 2005. And even worse than that? The executive suspected to be at the root of the scandal had been promoted to vice chairman of Wal-Mart … even after the company first learned of the bribes.

When Wal-Mart executives were first notified of wrongdoing, they effectively squashed an internal investigation, worried that news of the scandal would hurt the company’s bottom line. The irony, of course, is that the unveiling of this scandal, and the company’s lack of action, led Wal-Mart’s stock to fall nearly 5% on Monday and will likely cost the company many millions in legal and accounting fees and penalties.

Keep reading to learn more about what went down south of the border, and how it could affect Wal-Mart’s future.

Trouble in Mexico

In 2005, a former Wal-Mart de Mexico executive approached a company lawyer with some disturbing information: namely, allegations of bribes paid to Mexican officials for permits to build new Wal-Mart stores and expand all over the country.

Occurring over the course of years, investigators sent by Wal-Mart estimated that the bribes added up to more than $24 million, violated both Mexican and U.S. laws and necessitated further investigation by Wal-Mart.

How Wal-Mart Reacted

Rather than continue to root out the wrongdoing in Mexico, Wal-Mart executives in the U.S. shut down the investigation. At the time, the company’s stock was flagging, and they were receiving criticism from labor advocates. Executives worried that press leaks regarding this newest scandal would cause stock and confidence to plummet, as Mexico was expected to be a major growing market for the company.

The outcome that Wal-Mart dreaded has come to pass anyways—just seven years delayed.

The Future for Wal-Mart

Politicians in both Mexico and the U.S. are calling for an external investigation of the alleged wrongdoing: Settlements for likely charges could mean very large fines by both the Justice Department and the Securities and Exchanges Commission.

What’s more, the executives found guilty could face jail time. The executive who supposedly initiated the bribery, Eduardo Castro-Wright, was promoted to vice chairman in 2008. And current CEO Michael T. Duke was first notified of the allegations of bribery back in 2005 … when he was in charge of overseeing all foreign subsidiaries of the Wal-Mart corporation.

While no official charges have been filed yet, here’s a likely timeline:

  1. Wal-Mart will continue its internal investigation. Wal-Mart disclosed in December that it had started its own investigation … but only after finding out that The New York Times was looking into the allegations itself.
  2. Wal-Mart will likely share information with the Department of Justice and the Securities and Exchange Commission. If the company’s legal team can establish credibility, it’s likely that the two government departments will accept its findings and not conduct further independent reviews.
  3. Even if they do come forward with information, though, the government might still investigate. It’s hard for Wal-Mart to establish credibility, given that it had dropped its investigation in 2005, and didn’t pick it up until it knew that The New York Times was sniffing around. Additionally, the fact that high-ranking officials were involved–not just low-level employees–is also a sign that the government may choose to get involved.
  4. The government might want to make an example of Wal-Mart. The Foreign Corrupt Practices Act, which forbids bribery of foreign officialshas been under recent criticism for being an impediment to businesses, and the government might want to make an example of Wal-Mart to prove that it needs to be strictly enforced. Says one expert: “I think there’s going to be a lot of pressure to come down hard on them as a company, not entirely because of the actual violations but because of the failure to do anything internally when those violations came to light.”
  5. Charges depend on what investigators find. The New York Times speculates that possible charges could include foreign bribery, conspiracy and obstruction of justice. While the $24 million in bribes is no small number, The Times estimates that fines will far exceed what was paid in bribes.

Why Investors Care

Aside from the fact that the company’s financial future could be affected by large fines, the bribery scandal also casts doubt about the company’s inner workings. This is especially problematic for Wal-Mart, which claims to be a “values-based, ethically led company.” People who have invested in Wal-Mart because they believed in the company’s values could be more likely to sell their shares on account of the scandal.

(If you’re interested in investing in only socially responsible corporations, read this.)

By midweek, Wal-Mart stock was beginning to recover. As more details are uncovered about the scandal and its cover-up, and as official charges are filed, we’ll be watching to see how the company’s stock is affected.

These recent developments emphasize yet again why investors should avoid putting their money in individual company stocks, and should spread risk around: If you were heavily invested in Wal-Mart—as opposed to holding a balanced portfolio—your assets could take a nosedive due to this scandal.