The California State Teachers’ Retirement System (CalSTRS) has filed a lawsuit against current and former members of Walmart’s board of directors, and other company officers, charging them with gross violation of fiduciary duty in connection with the company’s Mexican bribery scandal. That scandal, extensively examined by a recent New York Times feature, revealed a corporation so eager to expand its Mexican operations that it ignored findings by its own investigators sent to look into the allegations.
CalSTRS’ move takes the form of a derivative-action suit – a suit nominally brought on behalf of Walmart against individuals whose actions damage the retail giant and potentially, investors such as CalSTRS.
CalSTRS is the second largest public pension fund in the United States and holds more than 5.3 million shares of Wal-Mart, valued at $313.5 million, accounting for 0.41 percent of CalSTRS global equities portfolio. Its suit was filed near the close of yesterday’s business day in Delaware.
Among many allegations, it claims that former Walmart CEO H. Lee Scott Jr. and former Wal-Mex CEO Eduardo Castro-Wright sold their shares of company stock for millions of dollars in profits once the New York Times began making inquiries for its bribery feature. (See chart below.)
The suit further alleges that several Walmart directors or officers were “incapable” of making independent decisions due either to ties to the Walton family or to personal business relationships with Walmart interests.
CalSTRS claims, for example, that director James Breyer “is a partner of Accel, which was a primary investor in Kosmix, a privately held social media technology firm. On April 18, 2011, Wal-Mart reported that it agreed to acquire Kosmix, which will form the basis of a new Wal-Mart operation called @Wal-Martlabs.”
Similarly, company president and CEO Michael Duke “serves on the Board of directors of Arvest Bank of Bentonville (“Arvest”), Arkansas. According to sources including Forbes magazine, Arvest is majority-owned and controlled by the Walton family.”
Wal-Mart spokesman Greg Rossiter has issued a statement to media outlets that said, “We take our responsibility to our shareholders very seriously. We are reviewing the lawsuit closely and are thoroughly investigating the issues that have been raised.” Messages left with Walmart’s media relations office requesting clarification have not been returned.
According to CalSTRS spokesman Michael Sicilia, the fund’s suit was prompted solely by the New York Times feature.
“It just shouted out at us as an example of poor corporate governance,” Sicilia told Frying Pan News. Although two years ago CalSTRS joined a shareholder lawsuit against officers and directors of Massey Energy following a disastrous accident in Massey’s Upper Big Branch Mine in West Virginia, this is the first time CalSTRS has filed a derivative-action suit on its own.
“With the exception of tobacco stocks,” Sicilia said, “we don’t have the ability to divest ourselves of individual stocks – they’re all indexed. So we’re using the hammer of being a big organization to try to bring good corporate governance to Walmart.”
CalSTRS has engaged consumer-protection powerhouse Girard Gibbs LLP, which has previously represented clients against such corporate giants as Apple, Tyson Foods, Blue Shield, General Motors and Chase. The fund has also engaged Labaton Sucharow LLP, which in the past has brought cases against Bear Stearns, Goldman Sachs and Countrywide Financial Corporation Securities.