The follow-up to the New York Times' blockbuster scoop on Wal-Mart's alleged cover-up of $24 million in Mexican bribes
has, quite rightly, focused on the company's potential Foreign Corrupt Practices Act exposure. But that's not the only law
Wal-Mart and its executives should be worrying about.
Good old Sarbanes-Oxley, passed in 2002 in the wake of
accounting scandals at Enron, WorldCom, Tyco, Adelphia, and
other public companies, was intended to prevent exactly the kind
of coverup Wal-Mart allegedly engaged in, according to the Times
report. The 10-year-old law imposed gatekeeper duties on
corporate lawyers, who are supposed to report material
violations of the securities laws up the chain of command, all
the way to the audit committee of the board, if necessary. SOX
also requires corporations and their auditors to report on the
company's internal controls for financial reporting -- and
requires that CEOs and CFOs certify the material accuracy of
financial reports. According to securities-law experts, if the
Times' allegations are true, Wal-Mart may have run afoul of all
of these provisions.
The bribery allegations originated with a Wal-Mart lawyer in
Mexico, who told Wal-Mart International's general counsel,
Maritza Munich, about the "irregularities." She authorized a
preliminary investigation by outside counsel in Mexico, then --
quite appropriately -- reported the findings to Wal-Mart's
then-GC Thomas Mars, among other senior officials. Mars brought
in Willkie Farr & Gallagher, which proposed that it conduct a
far-reaching internal investigation. So far, so good.
But instead of hiring Willkie, Mars allegedly sent the
Mexico bribery probe back down the ladder to the company's
internal investigations unit. According to the Times,
investigators turned up unsettling evidence implicating both a
fast-rising Wal-Mart de Mexico executive and Wal-Mart de
Mexico's general counsel in the bribery and accounting cover-up.
In a preliminary draft report in December 2005, the lead
in-house investigator wrote, "There is reasonable suspicion to
believe that Mexican and USA laws have been violated."
Foreign bribery wasn't the cause celebre in 2005 that it has
become today, but according to the Times, the company's
vice-chairman was already concerned about the "unacceptable risk
the government's stepped-up enforcement of the Foreign
Corrupt Practices Act." So after receiving a preliminary report
suggesting the company had broken the law, did Wal-Mart disclose
the findings to its own audit committee and to its shareholders?
It did not. According to the Times, the then-CEO, Lee Scott,
called a meeting in February 2006 to decide what to do. GC Mars
was among the tight group of senior executives who decided to
transfer the bribery investigation to the very same Wal-Mart de
Mexico general counsel who had been implicated in the
preliminary inquiry. The Mexican GC proceeded to wrap up the
investigation in a few weeks, finding no clear evidence of
bribery or law-breaking, the Times reported.
There are different SOX implications in those (alleged)
facts for Wal-Mart's former top lawyer and its former CEO. The
law's gatekeeper provisions for lawyers were very controversial
as the Securities and Exchange Commission drafted its
enforcement rule in 2003. Corporate lawyers were concerned that
senior execs wouldn't consult them on serious issues, for fear
the lawyers would run to the board. In fact, the SEC has not
taken action against any lawyer for failing to report up the
chain, according to Columbia Law School professor John Coffee
and SEC Actions blogger Thomas Gorman of Dorsey & Whitney. (An
SEC spokesman confirmed that there's been no formal enforcement
of the gatekeeper rule.)
"The SEC walked away from the rules," said Coffee. It's easy
to see why. SOX requires the corporate attorney to take
reasonable steps, which means the agency would have to probe the
lawyer's state of mind. There are also attorney-client privilege
problems. Gatekeeper cases are apparently a problem the SEC has
decided it doesn't need, and the folks I talked to agreed it's
unlikely Mars will be targeted.
But Coffee, Gorman, and UCLA Law School professor Stephen
Bainbridge -- who was the first to suggest that Wal-Mart might have a SOX problem -- all said that the CEO and CFO
certifications and internal controls responsibility could tempt
the government. The Justice Department has so far brought only
one criminal SOX false certification case, against former
Healthsouth CEO Richard Scrushy, who was acquitted on the
charge. (The SEC has brought "dozens" of false certification
enforcement actions, according to a spokesman.)
Bainbridge said, however, that prosecutors have been handed
the Wal-Mart case "on a silver platter by the New York Times,"
and may feel obliged to make an example of the executives who
signed off on the company's filings. "At a bare minimum, there
are disclosure problems," Bainbridge said.
"This could well be the first certification case" in
connection with unreported FCPA exposure, added Gorman of Dorsey
& Whitney. "Sarbanes-Oxley puts a lot of pressure on companies
to do the right thing," he said. "It's somewhat surprising to
see these allegations about a major company."
Falsely certifying financial results is no small matter for
corporate executives. The criminal statute calls for maximum
penalties of $1 million and 10 years imprisonment for a false
certification and $5 million and 20 years for a willfully false
Bainbridge pointed out that Wal-Mart's first line of defense
to SOX allegations will be to argue that the alleged Mexican
bribery was not material so it didn't have to be disclosed. Back
in 2005 and 2006, as the company was investigating the
allegations, there was no Justice Department or SEC case to
report to shareholders, and the company's final report concluded
there was no bribery. "You could imagine people saying, 'We
don't have to disclose,'" said Bainbridge. "You don't have a
certification case unless you have an underlying disclosure
case." (He believes it would be simpler for the SEC to assert a
controls case against the corporation.)
Coffee, however, said Wal-Mart's leaders should be worried.
"Senior people were hearing things went bad," he said. "I don't
know what they knew, but it's very likely they knew enough to be
concerned about the certifications."
A Wal-Mart spokesman declined to respond to emailed
questions about the company's potential SOX violations.
(Reporting by Alison Frankel)
Follow us on Twitter: @AlisonFrankel, @ReutersLegal