South of the Border Blues

David Hechler

Corporate Counsel

06-01-2012

The story of Wal-Mart's bribery scandal in Mexico has a wide cast of characters, but a lot of the key players were in-house lawyers. As in many scandals, it can be hard to predict who will emerge with reputations intact. But according to the reporting in The New York Times, which broke the story in April, it's at least possible to suggest a betting line.

The most prominent lawyer mentioned in the Times article is Thomas Mars, who was the general counsel of Wal-Mart Stores Inc. in 2005, when top executives learned of the alleged bribes. He's said to be one of a group of executives who refused to allow subordinates to hire a law firm to conduct a thorough investigation. (Mars and the other lawyers in this story did not respond to messages seeking comment.)

The current GC, Jeffrey Gearhart, isn't mentioned in the Times story. But Gearhart and Mars are career twins. Both attended law school at the University of Arkansas, served as editor of the law review, and went to work for the Rose Law Firm. They later became partners at Kutak Rock before they joined the Wal-Mart legal department—Mars as the GC in 2002, and Gearhart as GC of the corporate division in 2003. It's natural to wonder whether Mars discussed the allegations early on with Gearhart. Especially since Gearhart's bio on the company Web site indicates that in 2005 he supervised corporate governance, compliance, and risk management—duties that would require him to ensure compliance with the Foreign Corrupt Practices Act, which prohibits bribes to foreign officials.

Two other in-house lawyers figure prominently in the Times story. Sergio Cicero Zapata was said to be the in-house lawyer who was in charge of obtaining construction permits for Wal-Mart de Mexico. By his own account, he funneled more than $8 million to two outside lawyers who paid bribes to speed the process. The company's ability to fast-track approvals was said to be a big factor in its tremendous growth, which provided a big boost to Wal-Mart's global profits.

Cicero resigned in 2004, following nearly a decade as the company's top real estate lawyer in Mexico. He told the Times he left because he was tired of the pressures, and felt unappreciated after he was passed over for a promotion. It's unclear why Cicero decided to complain to company officials a year after he left, or go public with his story now, but he was clearly the most important source in the Times's 7,600-word report.

When Cicero decided to disclose the payoffs, in September 2005, the person he contacted was Maritza Munich, the general counsel of Wal-Mart International. Though Munich was based in the company's headquarters in Bentonville, Arkansas, she was very familiar with corporate culture in Mexico. She lived in the country for five years while serving as The Procter & Gamble Company's GC for Mexico and Central America before joining Wal-Mart in 2003.

Munich acted quickly after Cicero laid out his allegations. Within days she hired a lawyer in Mexico City to debrief him. Soon afterward, she flew down to meet with both men.

Cicero apparently had a lot more to share than his memories. Before he left the company, he'd kept careful notes to back him up—and he took these with him. He reportedly told the lawyer that it was to "protect him in case of any complaint or investigation." Speaking of Cicero, the lawyer added: "We did not detect on his part any express statement about wishing to sell the information."

Cicero's accusations directly implicated two high executives, according to the Times . One was a rising star in the company: Eduardo Castro-Wright, the CEO of Wal-Mart de Mexico during the period of robust growth. Though he'd only worked for the company since 2001, he was rewarded for its sterling performance with a promotion in early 2005 to a senior position in the United States. The other was Jose Luis Rodriguezmacedo Rivera, the general counsel of the Mexico subsidiary. Rodriguezmacedo joined the company in 2004, after working for years in Mexico for Citigroup. He, too, was reportedly well regarded in Arkansas.

Munich was undaunted by the prospect of investigating company execs. She passed along the information in detailed memos to senior management, including Mars, the company's top lawyer. And at first the response was what Munich expected. Wal-Mart hired an outside firm to look into the charges.

The firm, Willkie Farr & Gallagher, sifted through the information and recommended a full-blown, thorough investigation. Willkie was ready.

But Wal-Mart wasn't. Management decided to conduct a fast and more limited inquiry instead. So in-house investigators dug in. They, too, were impressed by what they found—including much to document Cicero's notes. They made rapid progress for a time. But they hit roadblocks when they approached Rodriguezmacedo. The GC pushed back. He reportedly resisted producing records, and generally treated the investigators with hostility.

When they persisted, pushback came to shove. According to the Times , Rodriguezmacedo told the investigators that Cicero had been fired. He added that Wal-Mart's former lawyer had likely defrauded the company by keeping the supposed bribes himself. The Times investigation convincingly debunked this charge, but the battle had been joined.

Wal-Mart executives were sympathetic to Rodriguezmacedo's complaint. The GC wasn't the first higher-up who had clashed with the internal investigators. Some complaints had gotten loud, and top bosses had called a halt to inquiries and allowed subordinates to investigate the people they reported to. (With predictable results.) The arguments this time included an overlying theme. Simply stated (with apologies to the movie Chinatown): "It's just Mexico, Sergio."

In the midst of this debate, Munich submitted her resignation. She had already weighed in favoring an independent investigation. She had complained when earlier investigations were turned over to the subordinates of accused executives. The Times gave no indication of her thinking, but her action seemed to have all the hallmarks of a withdrawal over ethics. She seemed to be saying: "I've seen this movie before."

As it turned out, she had. According to the Times , top execs told Mars and others to develop a new protocol for internal investigations. The one they came up with gave business leaders—including those under investigation—power over inquiries. Days later, the probe that Munich had begun was literally shipped via Federal Express to the very individual who felt the greatest heat: Rodriguezmacedo. He quickly wrapped it up. His six-page report (quoted by the newspaper) concluded: "There is no evidence or clear indication of bribes paid to Mexican government authorities with the purpose of wrongfully securing any licenses or permits."

Where did this leave the lawyers and their reputations?

Munich returned to her native Puerto Rico, where she is now general counsel at the insurer Medical Card System Inc. Her attorney, Nereida Melendez-Rivera, said in an interview that Munich has been in touch with Wal-Mart in recent days. Since the publication of the Times story, Munich's reputation is not only intact, it's been burnished.

At press time Rodriguezmacedo was no longer GC in Mexico. He'd been assigned to unspecified "other duties." The career prospects for the lawyer whom Wal-Mart once asked to lead a training session on the FCPA are uncertain.

Cicero seems to be in limbo. As a whistle-blower who also pointed the finger at himself, he could be in jeopardy. But it's hard to say. Whistle-blower protections in Mexico are basically nonexistent. But then so are prosecutions for bribery. And it's unclear whether U.S. whistle-blower laws apply to foreign nationals. His future could be teaching classes like the one Rodriguezmacedo led.

Mars is currently chief administrative officer for Walmart U.S. According to his company bio, he's in charge of, among other departments, compliance. This could prove a tad awkward as Wal-Mart meets with regulators. But the company recently announced that it's created a new FCPA global compliance position.

That leaves Gearhart. He oversees some 140 in-house counsel and also serves as corporate secretary. He has a lot on his plate these days, with investigations of the bribery scandal topping everything else. We may never learn whether he knew what was going on. But even if he was in the dark, his survival probably depends on the fate of those above him. And the betting line says the brooms are out.

With reporting by Catherine Dunn, Shannon Green, and Sue Reisinger.