Wal-Mart Shares Fall Under Cloud of Corruption in Mexico

It was revealed on Monday that Wal-Mart Stores WMT has seen its shares fall over 4% in pre-open trading amidst potentially crippling claims by the New York Times that employees at a subsidiary bribed Mexican officials over a period spanning several years. Perhaps the most damning part of the allegations is that WMT executives at the U.S. headquarters vetoed any thorough examination investigation. Or, in other words, they knew but 'didn't want to know'. In a statement released on Saturday, Wal-Mart said that it told the federal authorities about the problem, and that its own outside investigators will be continuing to meet with officials from the Department of Justice and the Securities & Exchange Commission. Following the release of the news, WMT shares dropped 4.6% on Monday morning. It is the 'burying of heads in the sand' approach which is proving to be most damaging. A large part of the claims is that executives heard allegations of bribery of Mexican officials over hundreds of payments coming in at roughly $24 million, but they did nothing to discipline the Wal-Mart de Mexico leaders, choosing instead to focus on damage control. If nothing else, the whole saga reeks of mismanagement. The Times claims that the investigation was given to Wal-Mart's general council in Mexico who, bizarrely, is the man accused of authorizing the bribes. So if the Times is correct, Wal-Mart asked this man to investigate himself. In addition, the executive who the Times says oversaw the majority of the bribes, Eduardo Castro-Wright was "punished" by being promoted to Wal-Mart vice chairman in 2008. If internal investigators were perceived as being too aggressive by then CEO Lee Scott, the Times claims that they were scolded. So what does the company say? "Many of the alleged activities in the New York Times article are more than six years old,” said David Tovar, vice president of corporate communications at Wal-Mart in a statement. “If these allegations are true, it is not a reflection of who we are or what we stand for. We are deeply concerned by these allegations and are working aggressively to determine what happened.” Tovar continues to push the fact that the bribes were allegedly made six years ago, as if that period of time would wash away any wrong doing, adding that, "We are working hard to understand what occurred in Bentonville more than six years ago and are committed to conducting a complete investigation before forming conclusions,” added Tovar. “We don't want to speculate or weave stories from incomplete inquiries and limited recollections, as others might do.” Wal-Mart also said that it doesn't believe the claims will have a "material adverse effect on our business,” but with the Times claiming that it has "credible evidence that bribery played a persistent and significant role in Wal-Mart's rapid growth in Mexico,” there will surely be some impact felt all over the company. On Monday, Citi published a research report stating that it believes WMT is dedicated to a thorough and transparent review after discussions with the company. It would use any weakness in the stock as an enhanced buying opportunity. Citi also said that WMT issued a statement reiterating its commitment to the U.S. Foreign Corrupt Practices Act (FCPA). The company has zero tolerance for non-compliance in any geography or level of the company. In the fall of 2011, WMT, through its Audit Committee, began an extensive investigation of compliance with the FCPA, which is being conducted by outside legal counsel and forensic accountants. So, for now, the analysts are continuing to publically back Wal-Mart. It will be interesting to see how long that lasts if the allegations prove to be completely true and lead to further discoveries. Sure, WMT is the world's biggest retailer and, therefore, a lot of money is at stake. But we live and die by our reputations. UPDATE: Walmart contacted this writer to say, "we are deeply concerned by these allegations and are working aggressively to determine what happened. We have shared a video and our statement here. Follow me @BCallwood.