In the Courts

Judge Rules Wal-Mart In-House Investigator's Findings Not Privileged

On May 5, Judge Susan O. Hickey of the Western District of Arkansas granted investors' motion to compel the testimony of a Wal-Mart “special investigator,” rejecting the company's privilege claims.

The case began in 2012 following a New York Times article detailing an alleged bribery scheme orchestrated by the company's Mexican subsidiary, Wal-Mart de Mexico, between 2003-2005. The City of Pontiac General Employees' Retirement System (PGERS) brought suit against Wal-Mart under the Securities Exchange Act of 1934 and SEC Rule 10b-5 for not disclosing its knowledge of the scheme, thereby artificially inflating the company's stock price. PGERS alleges it never recovered the value lost when the New York Times alerted the market to the scheme.

The newspaper's story revolved around an internal investigation into Wal-Mart de Mexico's alleged briberies. As a result of the article, the SEC's Foreign Corrupt Practices Unit opened an investigation that is still ongoing; the SEC has taken no enforcement action as yet.

When Wal-Mart executives first heard rumors of possible corrupt activity in 2005, they ordered Ronald Halter, a former FBI agent and then “special investigator” at Wal-Mart, to investigate.

Halter subsequently traveled to Mexico, reviewed Wal-Mart de Mexico records and interviewed its employees. The New York Times wrote that Halter's investigation confirmed corrupt activities on the part of Wal-Mart de Mexico. Halter allegedly discovered more than $24 million in bribes to various local and national government officials in exchange for permits allowing the company to rapidly expand all across Mexico. The newspaper also reported that Halter, upon returning to Wal-Mart's headquarters in the U.S., exhorted executives to investigate even further. In a confidential report to his superiors, Halter apparently stated: “[t]here is reasonable suspicion to believe that Mexican and USA laws have been violated.”

Further documents obtained by the New York Times indicate that Wal-Mart executives agonized over how to respond to Halter's report and recommendation. At the time, the company was under heavy pressure from labor critics, and feared the consequences of going public with a scandal that could devastate the company's stock price. The newspaper claimed top executives chose to do damage control instead of rooting out the corruption. H. Lee Scott, then the company's CEO, allegedly criticized Halter for being too zealous in his investigation. Instead of having Halter or another U.S.-based investigator pursue the issue, executives apparently shipped Halter's records to Mexico City and ordered Wal-Mart de Mexico's top lawyer to continue the investigation. This lawyer, however, was alleged by Halter to have authorized a number of the bribes at issue.

PGERS claims that this alleged cover-up harmed the value of their investment. Their case is currently in discovery. PGERS recently attempted to depose Halter, but Wal-Mart's counsel told Halter to refrain from answering any questions from PGERS related to “the creation, content and substance” of the documents Halter drafted and reviewed as a part of his investigation. Wal-Mart claimed that the documents and much of the testimony Halter did give was protected by the attorney-client privilege or the attorney work-product doctrine. Judge Hickey rejected both theories of privilege.

For the attorney-client privilege question, Judge Hickey cited Halter's testimony that he conducted his investigation “without any specific direction.” Judge Hickey noted that “[t]here are no facts in the record to suggest that the purpose of Halter's investigation was to gather facts so that Defendants could obtain legal advice or that Defendants represented to Halter or [his superior] Joseph Lewis that the investigation was commenced for the purpose of obtaining legal advice.” Further, Judge Hickey argued, neither Halter nor Lewis is an attorney and the facts indicated that neither communicated Halter's findings to a Wal-Mart attorney.

Judge Hickey ordered Wal-Mart to make Halter available for a second deposition and to produce Halter's investigative reports, interview reports, and any other factual compilations he drafted in 2005 and 2006.

*****
In the Courts and Business Crimes Hotline were written by Dennis Mahoney, an associate at Mayer Brown, Washington, DC.

Judge Rules Wal-Mart In-House Investigator's Findings Not Privileged

On May 5, Judge Susan O. Hickey of the Western District of Arkansas granted investors' motion to compel the testimony of a Wal-Mart “special investigator,” rejecting the company's privilege claims.

The case began in 2012 following a New York Times article detailing an alleged bribery scheme orchestrated by the company's Mexican subsidiary, Wal-Mart de Mexico, between 2003-2005. The City of Pontiac General Employees' Retirement System (PGERS) brought suit against Wal-Mart under the Securities Exchange Act of 1934 and SEC Rule 10b-5 for not disclosing its knowledge of the scheme, thereby artificially inflating the company's stock price. PGERS alleges it never recovered the value lost when the New York Times alerted the market to the scheme.

The newspaper's story revolved around an internal investigation into Wal-Mart de Mexico's alleged briberies. As a result of the article, the SEC's Foreign Corrupt Practices Unit opened an investigation that is still ongoing; the SEC has taken no enforcement action as yet.

When Wal-Mart executives first heard rumors of possible corrupt activity in 2005, they ordered Ronald Halter, a former FBI agent and then “special investigator” at Wal-Mart, to investigate.

Halter subsequently traveled to Mexico, reviewed Wal-Mart de Mexico records and interviewed its employees. The New York Times wrote that Halter's investigation confirmed corrupt activities on the part of Wal-Mart de Mexico. Halter allegedly discovered more than $24 million in bribes to various local and national government officials in exchange for permits allowing the company to rapidly expand all across Mexico. The newspaper also reported that Halter, upon returning to Wal-Mart's headquarters in the U.S., exhorted executives to investigate even further. In a confidential report to his superiors, Halter apparently stated: “[t]here is reasonable suspicion to believe that Mexican and USA laws have been violated.”

Further documents obtained by the New York Times indicate that Wal-Mart executives agonized over how to respond to Halter's report and recommendation. At the time, the company was under heavy pressure from labor critics, and feared the consequences of going public with a scandal that could devastate the company's stock price. The newspaper claimed top executives chose to do damage control instead of rooting out the corruption. H. Lee Scott, then the company's CEO, allegedly criticized Halter for being too zealous in his investigation. Instead of having Halter or another U.S.-based investigator pursue the issue, executives apparently shipped Halter's records to Mexico City and ordered Wal-Mart de Mexico's top lawyer to continue the investigation. This lawyer, however, was alleged by Halter to have authorized a number of the bribes at issue.

PGERS claims that this alleged cover-up harmed the value of their investment. Their case is currently in discovery. PGERS recently attempted to depose Halter, but Wal-Mart's counsel told Halter to refrain from answering any questions from PGERS related to “the creation, content and substance” of the documents Halter drafted and reviewed as a part of his investigation. Wal-Mart claimed that the documents and much of the testimony Halter did give was protected by the attorney-client privilege or the attorney work-product doctrine. Judge Hickey rejected both theories of privilege.

For the attorney-client privilege question, Judge Hickey cited Halter's testimony that he conducted his investigation “without any specific direction.” Judge Hickey noted that “[t]here are no facts in the record to suggest that the purpose of Halter's investigation was to gather facts so that Defendants could obtain legal advice or that Defendants represented to Halter or [his superior] Joseph Lewis that the investigation was commenced for the purpose of obtaining legal advice.” Further, Judge Hickey argued, neither Halter nor Lewis is an attorney and the facts indicated that neither communicated Halter's findings to a Wal-Mart attorney.

Judge Hickey ordered Wal-Mart to make Halter available for a second deposition and to produce Halter's investigative reports, interview reports, and any other factual compilations he drafted in 2005 and 2006.

*****
In the Courts and Business Crimes Hotline were written by Dennis Mahoney, an associate at Mayer Brown, Washington, DC.