Fogel v. Wal-Mart De México Sab De

MICHAEL FOGEL, individually and on behalf of all others similarly situated, Plaintiff, v. WAL-MART DE MÉXICO SAB de CV, ERNESTO VEGA, SCOT RANK,and WAL-MART STORES, INC., Defendants.

13 Civ. 2282 (KPF)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

February 27, 2017

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Lead Plaintiff Michael Fogel ("Plaintiff") brings this class action lawsuit on behalf of purchasers (the "Class") of American Depository Shares ("ADRs") of Walmart de México SAB de CV ("Wal-Mex"), for the period between December 8, 2011, and April 24, 2012, inclusive (the "Class Period"). Relying heavily on a 2012 news article concerning anticompetitive conduct that ended in 2005, and a related investigation into that conduct that ended in 2006, Plaintiff alleges that Defendants Wal-Mex, Ernesto Vega, Scot Rank, and Wal-Mart Stores, Inc., ("Wal-Mart," and together, "Defendants"), violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, in public statements that were issued as late as 2012. Defendants have moved to dismiss Plaintiff's Second Amended Complaint (the "SAC") pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) for failure to state a claim. Plaintiff has cross-moved to strike the three appendices attached to Defendants' motion.

A review of the record makes clear that Plaintiff has taken advantage of two separate opportunities to replead his complaint in response to contemplated dispositive motions from Defendants. And, indeed, the size of the operative pleading has jumped from (approximately) 23 pages and 61 paragraphs to 128 pages and 289 paragraphs, exclusive of the many exhibits. The Court has carefully considered Plaintiff's SAC, but concludes that the additional text has not remedied the many pleading deficiencies identified by Defendants. Accordingly, and for the reasons outlined below, Defendants' motion is granted and Plaintiff's motion is denied.

BACKGROUND¹

A. Factual Background

1. The Parties

Plaintiff is a holder of Wal-Mex ADRs that he purchased on March 7, 2012; March 26, 2012; and April 17, 2012. (See Dkt. #6, Ex. A; SAC ¶ 6). These purchases each occurred during the Class Period. (SAC ¶¶ 1, 6).

As relevant here, Defendant Wal-Mex "owns and operates a network of retail stores in México," Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica. (SAC ¶ 7). Six businesses comprise Wal-Mex: Bodega Aurrerá, Wal-Mart Supercenter, Superama, Sam's Club, Suburbia, and Vips. (Id. at ¶ 11).

Wal-Mex is a subsidiary of Defendant Wal-Mart.² More specifically, it is a subsidiary of Wal-Mart International, one of Wal-Mart's three divisions. (SAC ¶ 183). Plaintiff alleges that the parent and subsidiary are closely interrelated:

¦ Wal-Mex was created in 1997, at which time its principal shareholder was Wal-Mart, which owned 51% of Wal-Mex's shares. (Id. at ¶ 14).

¦ Today, Wal-Mart owns 70% of Wal-Mex and public shareholders own the rest. (Id. at ¶¶ 12, 14).³ Mexico isthe most successful foreign country in Wal-Mart's International segment. (Id. at ¶ 184).

¦ "Wal-Mart has the ability to designate at least a majority of the directors of Wal-Mex," "[m]any of the executives at Wal-Mex report directly to Wal-Mart," and "[m]any Wal-Mart executives reside on Wal-Mex's Board and committees." (Id. at ¶¶ 16-18; see also id. at ¶¶ 25-32).

¦ Wal-Mex issues Wal-Mart credit cards to its customers (id. at ¶ 23), and the "Investor Relations" section of Wal-Mex's Annual Reports from 2005 to 2012 "had an email exchange at Wal-Mart.com" (id. at ¶ 24).

Vega is a Wal-Mex employee who has held a variety of executive positions at the company. (SAC ¶ 8). In 2004, and again from 2009 to 2011, Vega was a member of the Wal-Mex Board of Directors (the "Wal-Mex Board"). (Id.). From 2005 to 2008, Vega was the Chairman of that Board, and in 2012 he was its alternate member. (Id.). Vega has also served on Wal-Mex's Audit and Corporate Practices Committees. (Id.). In 2004 and 2006 to 2009, Vega was a member of the Audit Committee, and in 2005 and 2010 to 2012 he served as its Chairman. (Id.).⁴ And Vega was a member of the Wal-Mex Corporate Practice Committee from 2006 to 2009 before becoming its Chairman from 2010 to 2012. (Id.).⁵ Plaintiff alleges that in these roles, Vega was involvedwith several persons who were implicated in a bribery scheme that the Court will describe in more detail below: (i) Eduardo Juárez, who was the "Vice President of Internal Audit of Wal-Mex" from 2005 to 2008 and "reported to Vega" in Vega's capacity as the Audit Committee's Chairman (id. at ¶¶ 9, 42); (ii) Cesaro Fernández, who served as Chairman of the Wal-Mex Board while Vega was a Board Member (id. at ¶ 10); (iii) Eduardo Castro-Wright, who was a member of the Wal-Mex Board at the same time as Vega (id. at ¶ 34); and (iv) R. Lee Stucky, who was an Audit Committee Member in 2005 while Vega was the Committee's Chairman and "reported to Vega," (id. at ¶¶ 53, 62 n.4, 71).

Rank is situated similarly to Vega. Rank joined Wal-Mex in 2000 as the Deputy Vice President of Bodega Aurrerá, and was named its Vice President six months later. (SAC ¶ 11). "In 2003, Rank became Senior Vice President of Self Service and oversaw all of the Bodega Aurrerá, Wal-Mart Supercenter and Superama units at Wal-Mex." (Id. (emphasis omitted)). By 2005, Rank had risen to serve as Wal-Mex's Executive Vice President and Chief Operating Officer, and as such was responsible for all six of its underlying businesses. (Id.). Rank served in this capacity until 2010, when he became the CEO of Wal-Mex, which position he maintained through 2012. (Id.). Rank additionally served as a member of Wal-Mex's Executive Committee and Board from 2010 to2012.⁶ and as a member of its Social Responsibility Committee in 2011 and 2012.⁷ (Id.). As he did with regard to Vega, Plaintiff alleges that in these roles, Rank was involved with persons who were implicated in the Wal-Mex bribery scheme: (i) Xavier del Rio, who was the Senior Vice President of Real Estate at Wal-Mex from 2005 to 2009, and "reported to Rank" (id. at ¶¶ 48, 77, 78); (ii) Jose Luiz Rodriquezmacedo, who was Wal-Mex's Senior Vice President of Legal and Corporate Relations from 2010 to 2011, "where he answered to Rank who was then CEO of Wal-Mex" (id. at ¶ 49; see also id. at ¶ 75); and (iii) Eduardo Juárez, who "reported to Vega and Rank" (id. at ¶¶ 69, 76).

2. The Alleged Bribery Scheme

On April 21, 2012, the New York Times published an article by David Barstow titled, "Wal-Mart Hushed Up a Vast Mexican Bribery Case" (the "Times Article"). (SAC, Ex. Q & ¶ 181). The Times Article exposed an internal investigation of alleged bribery at Wal-Mex that was conducted by Wal-Mart in 2005 and 2006. (SAC, Ex. Q; see also SAC ¶¶ 84-181). Plaintiff's SACreproduces the facts reported by Mr. Barstow as the bulk of the alleged facts underlying Plaintiff's claims for relief. (Compare SAC, Ex. Q, with SAC ¶¶ 84-181). The Court will recount them briefly here.

Plaintiff's timeline begins in 2003, when "Kroll Inc., ('Kroll'), a leading investigative firm, conducted a confidential investigation for Wal-Mart" concerning Wal-Mex. (SAC ¶ 84). Kroll "concluded that top Wal-Mex executives had failed to enforce their own anticorruption policies, ignored internal audits that raised red flags and even disregarded local press accounts" to perpetuate a systematic tax evasion scheme. (Id. at ¶¶ 84-85). Kroll also evaluated Wal-Mex's internal audit and antifraud units, which it "branded ... 'ineffective.'" (Id. at ¶ 86).

On September 21, 2005, Sergio Cicero, who "served as the Director of Legal at Wal-Mex," and who had worked for nearly 10 years in its real estate department before his 2004 resignation (SAC ¶ 35), emailed Martiza I. Munich, "who served as Vice President and General Counsel of Wal-Mart from 2003 to 2006" (id. at ¶¶ 19, 46), to inform her that he had information regarding "irregularities" that had been authorized by senior management at Wal-Mex. (Id. at ¶ 88). Munich promptly hired attorney Juan Francisco Torres-Landa to assist her in debriefing Cicero regarding the alleged "irregularities." (Id. at ¶¶ 54, 91; see also SAC, Ex. J). Cicero detailed an extensive bribery scheme, which had been "bolstered ... with fraudulent accounting," and which "implicated many of Wal-Mex's leaders." (Id. at ¶ 92). The purpose of the scheme was to facilitate the construction of "hundreds of new stores so fastthat competitors would not have time to react." (Id. at ¶ 95). Cicero was aware of the scheme because he himself "helped funnel bribes through gestores." (Id. at ¶ 97).⁸ "[I]t was his job to recruit the gestores. He worked closely with them, sharing strategies on whom to bribe," and "also approved Wal-Mex's payments to [them]." (Id. at ¶ 98).

In November 2005, Wal-Mart Special Investigator Ronald Halter undertook a preliminary inquiry into Cicero's allegations. (SAC ¶¶ 39, 109-11). Halter and his team found evidence that appeared to confirm Cicero's allegations, and which also indicated that a prior audit had flagged potential bribery in 2004. (Id. at ¶¶ 111-21). Still other evidence suggested that Wal-Mex was making substantial donations to Mexican governmental entities. (Id. at ¶¶ 122-24). These findings were shared with Wal-Mart's Audit Committee, CEO, and General Counsel, and through them, the Wal-Mart Board. (Id. at ¶¶ 125, 141-42). Halter indicated that he had "reasonable suspicion ... to believe that Mexican and [United States] laws [had] been violated." (Id. at ¶ 142 (internal quotation marks omitted)). He also provided a plan "for a deeper investigation that would plumb the depths of corruption and culpability at Wal-Mex." (Id. at ¶ 143).

In January 2006, Munich advised Wal-Mart's leadership that Wal-Mart needed "to conduct an extensive investigation to root out wrongdoing." (SAC ¶ 152). But...