In another of what will likely be many such lawsuits by pension funds, New York City Pension Funds filed a shareholder derivative action against Wal-Mart over the bribery and corruption scandal involving Wal-Mart’s Mexican subsidiary, Wal-Mex. This follows the California State Teachers retirement systems’s similar filing in late May.
The New York City complaint similarly alleges that Wal-Mart’s officers and directors breached their fiduciary duty to the company and its shareholders by failing to properly handle credible claims of the bribery allegations and attempting to cover up details of the scandal, reducing the value of the company by their actions.
For anyone not familiar with a derivative suit, the principal is that the shareholders of a corporation seek damages from directors to reimburse losses to the corporation for which the directors can be held personally responsible, as an exception to the “business judgment rule“.
A key aspect of evidence for plaintiffs in a derivative suit is finding a direct causal link between the directors’ actions (or inaction) and the eventual loss sustained by the corporation. In this case, it’s relatively simple to show that 1) Wal-Mart’s stock price took a big hit on the bribery news and 2) Wal-mart’s goodwill and market position has (again) been damaged. Now, the plaintiffs have to show the link.
A related suit, based on securities fraud, was filed by the City of Pontiac General Employees Retirement System in Tennessee. According to Reuters, a total of 11 derivative suits have been filed against Wal-Mart since the New York Times story ran.
It is imperative for board members and executives to realize that when they are made aware of corruption allegations that they follow advice of counsel and comply fully with internal audit procedures. In this case, it is up to Wal-Mart to show they did. If not, there will be not only the DOJ and SEC to deal with, but many angry pension fund managers and likely other shareholders brought together as a class by the many American law firms specializing in such matters. This story will continue until Wal-Mart manages to come to terms with what actually happened in Mexico (and elsewhere, depending on findings).