Wal-Mart Stores (
WMT
) were down 4.6% on Monday after the company has come under
investigation under the Foreign Corrupt Practices Act (FCPA) for
alleged
bribery at its Mexican affiliate
.
Wal-Mart sent investigators to Mexico City in 2005 when a company
lawyer was tipped off to possible bribery by a Wal-Mart de Mexico
executive to speed up store openings in the country.
The company found suspected payments of more than $24 million
but then shut down the investigation and failed to notify either
Mexican or U.S. officials.
While the story looks bad, and will possibly result in
criminal charges and hefty fines, the market may be
overreacting.
The 4.6% drop in shares effectively erased up to $9.9 billion
dollars of market value from the company. Looking at prior
precedent in FCPA cases and settlements, this is well over what
the company would be expected to pay. Even with a possible
slowdown in expansion and the bad publicity, it is doubtful that
Wal-Mart should be valued at almost ten billion dollars less.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act of 1977 is a federal law
primarily used to prosecute accounting transparency requirements
under the SEC and bribery of foreign officials. Any U.S. or
foreign corporation that has registered securities with the SEC
can be prosecuted under the act. The Department of Justice (DOJ)
boasts that 32 cases were prosecuted in 2010.
Legal precedents
Though it is hard to estimate the final price effect on the
stock from a settlement with the SEC and the Department of
Justice, previous precedents can help put a range on possible
settlement expenses. The online blog of the FCPA lists the
top ten settlements under the act
and details for each.
These range from $800 million for Siemens (
SI
,
quote
) in 2008 to $48.1 million for Royal Dutch Shell (
RDS.A
,
quote
) in 2010. Most of these settlements include a large criminal
fine along with a civil disgorgement of profits.
A more appropriate precedent may be available through the
Armor Holdings settlement last year. The company was accused
under both the anti-bribery and accounting provisions of the
Foreign Corrupt Practices Act for setting up a sham consulting
agreement with a 3
rd
party to bribe a U.N. official.
The company cooperated with DOJ and SEC investigators and was
able to reach a non-prosecution agreement for $5.7 million. This
amount pales in comparison to some of the larger settlements,
especially those including criminal fines, but reflects the level
of cooperation involved in the case.
While the bribery charges are certainly welcomed by both
activists and competitors, it will not slow the world's largest
retailer from global expansion. Shares currently trade for just
over 13.0 times trailing earnings and pay a healthy 2.5% dividend
yield. Even with Monday's dip, the stock is up about 11.4% over
the past twelve months and just over 23.0% from lows hit last
September.
