Securities Regulation Daily Finding no actionable claims, court rolls back fraud suit against Wal-Mart
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Monday, February 27, 2017

Finding no actionable claims, court rolls back fraud suit against Wal-Mart

A federal court dismissed a class action lawsuit against Wal-Mart, its Mexico subsidiary (Walmart de Mexico SAB de CV, or "Wal-Mex"), and two executives over alleged misrepresentations about a bribery scheme. Several of the claims were time-barred, and the remaining claims were inadequately pleaded regarding material facts and scienter to survive dismissal under the PSLRA (Fogel v. Wal-Mart de Mexico SAB de CV, February 27, 2017, Failla, K.).

Bribery scheme, investigation, and report. According to a New York Times article published in April 2012, between 2003 and 2006, employees of Wal-Mex engaged in an extensive bribery scheme to facilitate the rapid construction of hundreds of new stores by making substantial donations to Mexican governmental entities. While Wal-Mex and Wal-Mart commenced investigations into the scheme, it did not come to light until the Times article. The price of Wal-Mex’s American Depository Receipts (ADRs) fell 12.2 percent and then 4.3 percent following the publication of article.

A Wal-Mex ADR holder sued Wal-Mart, Wal-Mex, and two executives who held various executive positions within the company, alleging misrepresentations in Wal-Mex’s annual reports from 2004 through 2011, as well as statements made on Wal-Mex’s website, in a series of Wal-Mex press releases, and a Wal-Mart quarterly report issued in 2011. The defendants moved to dismiss.

Timeliness. The court first noted that under the Sarbanes-Oxley Act’s statute of repose, claims are barred if they are brought more than five years after the Exchange Act violation on which they are premised. Because the original complaint was filed in April 2013, the court dismissed any claims premised on Wal-Mex’s annual reports for 2004, 2005, and 2006.

The court also found that Sarbanes-Oxley’s statute of limitations barred claims raised for the first time in the plaintiff’s amended complaints, including all claims against Wal-Mart and former executive Scot Rank, who were not named prior to December 2014, and claims against former executive Ernesto Vega and Wal-Mex that were not alleged until the amended complaints were filed.

Scienter. Regarding the substance of the plaintiff’s fraud claims, the court found that the complaint lacked facts supporting a strong inference of scienter. Examining the pleaded facts against Vega under a recklessness standard, the court advised it was insufficient that one of the individuals culpable in the bribery scheme reported to Vega directly, finding it conclusory and based only on Vega’s job title.

The court also found that the complaint did not contain sufficient facts that would impute the scienter of Wal-Mex employees to Wal-Mex. Having already found that Vega lacked scienter, the court analyzed the pleadings as to Rank, which again put forward the "reported directly to" argument, as well as alleging that Rank was the executive driving the opening of the new Wal-Mex stores. These allegations also infer scienter from Rank’s position alone, and are thus inadequate to show scienter under Section 10(b), according to the court.

Actionable misrepresentation or omission. The complaint also failed to allege any actionable misrepresentation or omission, the court found. The challenged statements in the annual reports and on the Wal-Mex website are "inactionable, immaterial puffery," according to the court. In addition, the plaintiff did not allege any facts demonstrating that the cited statements were false. The court also referred to its earlier analysis that newly pleaded claims arising from certain statements by the defendants not in the original complaint were time-barred.

Scheme liability and controlling person claims. In addition, the court rejected the plaintiff’s argument that the defendants could be liable under a scheme liability theory because the alleged scheme was in fact the illegal bribery scheme conducted between 2003 and 2006, pointing out that it would be barred by the statute of repose. It also dismissed his controlling person claim under Section 20(a) because he had failed to state a claim under Section 10(b).

Finding that granting leave to file a third amended complaint would be futile, the court dismissed the complaint with prejudice.

The case is No. 13-cv-02282.

Attorneys: Gregory M. Egleston (Gainey McKenna & Egleston) for Michael Fogel. Brian T. Glennon (Latham & Watkins) for Ernesto Vega, Wal-Mart de Mexico SAB de CV and Wal-Mart Stores, Inc.

Companies: Wal-Mart de Mexico SAB de CV; Wal-Mart Stores, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FraudManipulation NewYorkNews

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