Wal-Mart Stores Inc lost $10 billion of its market value on Monday on concerns that a bribery investigation in Mexico could be very costly and hinder its plans to grow.
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In a sign that the problem was widening for the world's largest retailer, lawmakers in the United States and Mexico called on authorities to investigate allegations in a New York Times article that Wal-Mart de Mexico had engaged in a campaign of bribery to build its business.
Legal and retail experts said the allegations, if true, could violate the U.S. Foreign Corrupt Practices Act (FCPA) - which forbids bribes to foreign government officials - and badly hamper Wal-Mart and its management for years.
They also raised concerns about Wal-Mart Chief Executive Mike Duke and former CEO Lee Scott who were among senior executives allegedly aware of the situation. Scott still sits on the company's board.
Two Democratic U.S. lawmakers, Elijah Cummings and Henry Waxman, said they were launching an investigation into the matter and sent a letter to Duke requesting a meeting.
The Times report "raises significant questions about the actions of top company officials in the United States who reportedly tried to disregard substantial evidence of abuse," Cummings and Waxman said in a statement.
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Shares of Wal-Mart de Mexico, which is 69 percent-owned by Wal-Mart and known as Walmex, fell 12 percent to 37.89 pesos ($2.88). The drop wiped out a 12 percent year-to-date gain in the second-most-weighted stock on Mexico's IPC index.
Shares of Wal-Mart fell 4.7 percent to $59.54, wiping some $10 billion off their market value. The stock is a component of the Dow Jones industrials index, which ended 0.8 percent lower.
"Entering additional countries is a cornerstone of Wal-Mart's growth strategy," Consumer Edge Research analyst Faye Landes wrote in a research note. "We can foresee the authorities in some key countries, notably India, becoming dramatically less welcoming to Wal-Mart following the release of the allegations."
The New York Times reported on Saturday that a senior Wal-Mart lawyer received an email from a former Walmex executive in September 2005 that described how the Mexican company had paid bribes to obtain permits to build stores in the country.
According to the Times, Wal-Mart sent investigators to Mexico City and found a paper trail of suspect payments totaling more than $24 million. But the company's leaders shut down the probe and did not notify U.S. or Mexican law enforcement officials until after the newspaper informed Wal-Mart that it was looking into the issue, the Times reported.
"FCPA cases are both extensive and expensive, including penalties for individuals/entities for both anti-bribery and accounting provisions," said Deutsche Bank retail analyst Charles Grom.
Wal-Mart said it was deeply concerned about the matter and began an investigation into its FCPA compliance last fall. It said it disclosed the probe to the U.S. Department of Justice and the Securities and Exchange Commission, and declined to give any more details or to make executives available for comment.
In a memo entitled "Integrity" sent to Wal-Mart employees on Monday, Duke said the company takes compliance with FCPA "very seriously, and we will not tolerate violations anywhere or at any level of the company." The memo included a link to Wal-Mart's global ethics office website and phone hotline.
"My firm expectation is that Walmart will always follow the law, but my expectation also goes far beyond following the law. We will do what's right - not just what is legal - and our actions will show the utmost integrity at all times," he said.
EXPENSIVE AND EXTENSIVE
Two opposition left-wing senators in Mexico called for an investigation, though prosecutors said they would do so only if asked by the Ministry of Finance or Ministry of the Economy.
"If licenses were given out where they shouldn't have been, there's fraud not only in the cities where that happened, but also there could have been fiscal fraud," Francisco Javier Castellon of the Party of the Democratic Revolution (PRD) was quoted as saying in the newspaper Rumbo de Mexico.
Leftist presidential candidate Andres Manuel Lopez Obrador said on Sunday that the allegations showed the government was "rotten," and he expressed dismay that the case was so far only being investigated outside Mexico.
Bribery and corruption are pervasive in Mexico, where the justice system is weak and lower-level public sector workers earn relatively low salaries. A study last year by Transparency International showed that Mexican companies were perceived to be the third-most likely behind those in China and Russia to pay bribes abroad.
BMO Capital Markets analyst Wayne Hood said in a research note that Wal-Mart's growth could be hurt both domestically and abroad. "Articles like this will be used against the company by activists and competitors when it attempts to open stores in the U.S. and abroad," Hood wrote in a note on Monday.
But others said the share drop could actually provide a buying opportunity, given that Wal-Mart shares had been trading near a 52-week high on optimism over the recovery in its U.S. business. Options market activity also suggested a bullish bias on Wal-Mart stock.
Citigroup analysts said in a note that, after discussions with Wal-Mart, it believed that the retailer would conduct a "thorough and transparent" review and said any pressure on the stock was "an enhanced buying opportunity."
The California State Teachers' Retirement System (CalSTRS), which currently holds over 5.5 million shares of Wal-Mart Stores, will continue to keep its exposure to the retail giant "until we find out what happens," CalSTRS's director of corporate governance, Anne Sheehan, told Reuters.
Some hedge fund managers said Walmex was the more attractive target for short sellers. Walmex said on Monday it does not believe the allegations will hurt its business.
"Wal-Mart is considered one of the best companies in terms of transparency in Mexico, and that is why it was so hard-hit," said Jorge Lagunas, a portfolio manager at brokerage Interacciones in Mexico City.
Lawyers said Wal-Mart could face shareholder lawsuits accusing the company of securities fraud for having inflated its stock price by misleading investors about its FCPA compliance. Cosmetics maker Avon Products Inc faces similar lawsuits over its activities in China.
Wal-Mart executives and directors, like their Avon counterparts, could face "derivative" lawsuits accusing them of covering up or turning a blind eye to the alleged bribes.
These lawsuits seek to force executives, or their insurers, to pay money directly to Wal-Mart for breaching or ignoring their duties, and for the company to tighten internal controls.
Shareholders could also use the power of the ballot box. At Wal-Mart's June 1 annual meeting, they could vote out directors they deem responsible for allowing the bribery, including the four independent directors who comprise the audit committee.
($1 = 13.17 pesos)