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Issues To Consider From The Walmart Enforcement Action

Issues

This prior post went in-depth into the long-awaited Walmart Foreign Corrupt Practices Act enforcement action in which the company agreed to pay the DOJ/SEC approximately $283 million. This post highlights additional issues to consider from the enforcement action.

Timeline

Walmart was under FCPA scrutiny since approximately mid-2011. Thus, from start to finish its FCPA scrutiny lasted an unconscionable approximate 8 years. There is simply no excuse for this and the DOJ/SEC have long-recognized the issues associated with long-drawn out investigations.

For instance, in this 2005 speech the DOJ’s then Assistant Attorney General of the Criminal Division stated:

“Simply put, speed matters in corporate fraud investigations.  The days of five-year investigations, of agreement after agreement tolling the statute of limitations – while ill-gotten gains are frittered away and investor confidence sinks – are increasingly a thing of the past.”

As highlighted here, a notable development from 2017 was when then Acting Principal Deputy Assistant Attorney General Trevor McFadden stated it was the DOJ’s “intent … for our FCPA investigations to be measured in months, not years.”

The length of Walmart’s FCPA scrutiny was simply inexcusable given that the DOJ stated:

“the Company received full credit for its cooperation with the Fraud Section and the Office’s investigation into conduct in Brazil, China, and India and partial cooperation credit for its investigation into conduct in Mexico; its cooperation included: conducting a thorough internal investigation; proactively identifying issues and facts that would likely be of interest to the Fraud Section and the Office, and providing updates to the Fraud Section and the Office; making regular factual presentations to the Fraud Section and the Office and sharing information that would not have been otherwise available to the Fraud Section and the Office; voluntarily making foreign based employees available for interviews in the United States; producing documents, including translations, to the Fraud Section and the Office from foreign countries in ways that did not implicate foreign data privacy laws; obtaining cooperation of former employees and third parties, including their consent to interviews; providing counsel to employees and founer employees to facilitate their cooperation; collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section and the Office; and identifying, investigating, and disclosing conduct to the Fraud Section and the Office that was outside the scope of the Company’s initial disclosures.”

Likewise, the SEC stated:

“Walmart … cooperated by identifying issues and facts that would likely be of interest to the Commission and the staff and providing regular updates to the staff; making regular factual presentations to the staff and sharing information that would not have been otherwise readily available to the staff; making foreign-based employees available for interviews in the United States; producing translations of relevant documents; and obtaining cooperation of former employees and third parties, including their consent to interviews.”

The length of Walmart’s FCPA scrutiny is particularly egregious given that the company disclosed the settlement amount in approximately November 2017. Should it really take an additional 1.5 years for the government to resolve an enforcement action when the company agreed to the settlement amount?

In short, the DOJ/SEC must simply resolve instances of FCPA scrutiny much quicker and the length of Walmart’s scrutiny was inexcusable and speaks poorly of the legitimacy and quality of the government’s FCPA enforcement program.

Pre-Enforcement Action Professional Fees and Expenses and Compliance Enhancement Expenses

Over the past approximate 7 years, these pages have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses and compliance enhancement expenses. While some pundits ridiculed me for doing so, it quickly caught on as the popular thing to do.

And with good reason because, as has been noted in numerous prior posts and in the article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny. Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

Indeed, Walmart has disclosed approximately $910 million in pre-enforcement action professional fees and compliance enhancement expenses. (Note: Walmart stopped disclosing such expenses in February 2019 in connection with its Q4 FY2019 earnings release. The company’s Q1 FY2020 earnings release did not disclose such expenses).

The ripple effects of Walmart’s FCPA enforcement action now moves into the post-enforcement action phase and with a monitor appointed (more on that in a future post and how this is just plain ridiculous) Walmart will continue to incur likely millions over the next two years. It will be interesting to see if the company discloses such post-enforcement action professional fees and expenses.

The Other Action

As stated in Walmart’s SEC filing on the day of the FCPA enforcement action:

“On June 20, 2019, the Company also agreed to enter into an Administrative Agreement with the U.S. Environmental Protection Agency (the “EPA”) for a three year term, which replaces the interim administrative agreement between the Company and the EPA dated May 28, 2013. The May 28, 2013 agreement arose as part of a settlement by the Company regarding certain hazardous waste materials matters with several governmental authorities. The new EPA agreement, among other things, will resolve any debarment or suspension as to participation in federal government programs by the Company due to the [FCPA] NPA, the Plea Agreement, and the SEC Order, provided that the Company fulfills the terms and conditions of the new agreement, will require reporting by the Company to the EPA periodically during the three-year term, and will require a new, limited two-year monitorship. The monitor referenced above to be engaged by the Company under the [FCPA] NPA will also monitor compliance with the new EPA agreement. If the DOJ monitorship is extended as referenced above, the EPA monitorship also may be extended for an additional year.”

Statute of Limitations

The conduct at issue in the Walmart enforcement action occurred approximately 10 – 20 years prior to the enforcement action and the conduct is beyond any conceivable statute of limitations. However, when a company like Walmart cooperates and waives or tolls the statute of limitations this fundamental black-letter legal principle matters little.

No-Charged Bribery Disgorgement

Despite the many media headlines containing the “bribery” word in recent days, Walmart was not charged with or found to be in violation of FCPA’s anti-bribery provisions. Rather, both the DOJ and SEC’s enforcement action involved alleged violations of the FCPA’s books and records and internal controls provisions.

Nevertheless, 100% of the SEC’s $144 million enforcement action consisted of disgorgement and prejudgment interest. This represents yet another example of no-charged bribery disgorgement (in other words the SEC seeking a disgorgement remedy in the absence of FCPA anti-bribery charges or findings).

As highlighted in this previous post (and numerous prior posts thereafter), so-called no-charged bribery disgorgement is troubling. Among others, Paul Berger (here) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

The disgorgement amount is also problematic from a statute of limitations perspective. As highlighted in this previous post, in 2017 the Supreme Court unanimously held in Kokesh that disgorgement was subject to a five year statute of limitations. Yet once again, statute of limitations matter little when issuers cooperate and agree to resolve SEC enforcement actions in the absence of judicial scrutiny.

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