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Fogel v. Wal-Mart De Mexico SAB de CV

United States District Court, S.D. New York

February 27, 2017

MICHAEL FOGEL, individually and on behalf of all others similarly situated, Plaintiff,


          KATHERINE POLK FAILLA United States 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.


         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 is the 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” (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 involved with 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 to 2012.[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 SAC reproduces 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 fast that 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, Plaintiff alleges, “there was no interest at Wal-Mart or Wal-Mex in making a good faith effort to fix the corruption problem, ” so “Munich submitted her resignation, effective February 1, 2006.” (Id. at ¶ 153).

         On February 3, 2006, a meeting was held “to discuss revamping Wal-Mart's internal investigations and to resolve the question of what to do about Cicero's allegations.” (SAC ¶ 156). A new protocol was devised for internal investigations that “gave senior Wal-Mart executives - including executives at Wal-Mex being investigated - more control over internal investigations.” (Id. at ¶ 158 (emphasis omitted)). Four days later, the Wal-Mex bribery investigation was transferred “to one of its earliest targets, ” Rodriquezmacedo. (Id. at ¶ 160). This transfer is alleged to have violated even the new protocol, according to which Wal-Mart's Corporate Investigations unit was still required to handle “significant” allegations, which Cicero's allegations had been deemed to be. (Id. at ¶ 164).

         Rodriquezmacedo finished his investigation within just “a few weeks.” (SAC ¶ 166). He concluded that there was no evidence of bribes paid to secure licenses or permits, or given to government authorities. (Id. at ¶ 167). He announced a “renewed commitment by Wal-Mex to Wal-Mart's anticorruption policy, ” but did not “recommend any disciplinary action against his colleagues.” (Id. at ¶ 175). Wal-Mart's Director of Corporate Investigation Joseph R. Lewis found Rodriquezmacedo's report to be “lacking.” (Id. at ¶¶ 157, 177-79). Yet, on May 10, 2006, Rodriquezmacedo was told to finalize his report and conclude the investigation. (Id. at ¶ 180).[9]

         All of this came to light when the New York Times published its article on April 21, 2012, “after months of investigation.” (SAC ¶ 181). On the first two days of trading following the publication of the Times Article, “Wal-Mex's ADRs were pummeled, ” falling 12.2% on Monday, April 23, 2012, and a further 4.3% on Tuesday, April 24, 2012. (Id. at ¶ 249). Congress announced that it would be opening an investigation into the allegations reported in Times Article, which it did. (Id. at ¶¶ 250-54; see also SAC, Ex. EE). A press release published on February 24, 2014, indicated that Wal-Mex had decided to focus on remodeling old stores rather than continuing its campaign to open new ones. (SAC ¶ 255).

         B. Procedural History

         This lawsuit was filed April 5, 2013, against Vega and Wal-Mex. (Dkt. #1). On June 4, 2013, then-Class Member Fogel moved the Court for an order appointing Fogel as Lead Plaintiff in this case and approving his selected counsel as Lead Counsel. (Dkt. #4-6). This motion was granted on June 10, 2013. (Dkt. #7).

         On December 8, 2014, Plaintiff filed his First Amended Complaint (the “FAC”), bringing for the first time claims against Wal-Mart and Rank, in addition to the claims brought in Plaintiff's original Complaint. (Dkt. #29). The parties appeared before the Court on March 3, 2015, for a pre-motion conference, and the Court granted Defendants leave to file their contemplated motion to dismiss the FAC pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. #43-44). Defendants filed their motion to dismiss on April 6, 2015 (Dkt. #46-49); Plaintiff filed his opposition on May 8, 2015 (Dkt. #51-53); and Defendants filed their reply on May 22, 2015. (Dkt. #54).

         Because Plaintiff had considerable difficulty serving the FAC on Rank, Rank was not served until October 22, 2015, by which point Defendants' motion to dismiss the FAC was fully briefed. (See Dkt. #62). When Rank appeared and indicated that he too wished to file a motion to dismiss the FAC, the Court directed the parties to appear for a second pre-motion conference. (Dkt. #76-77). That conference was held on December 30, 2015. (Dkt. #81-82). For the reasons there discussed on the record, the Court denied Defendants' pending motion to dismiss without prejudice to its renewal and set a schedule for Defendants to file their renewed motion. (Id.).

         Defendants filed their second motion to dismiss the FAC on February 5, 2016. (Dkt. #85-87). In lieu of his opposition, Plaintiff requested leave to file a second amended complaint (the “SAC”) on April 4, 2016, which request Defendants did not oppose. (Dkt. #91). The Court therefore ordered that the pending motion to dismiss be withdrawn, and granted Plaintiff leave to file the SAC. (Dkt. #92). The Court “anticipate[d] that this [would] be Plaintiff's last request to amend.” (Id.).

         Plaintiff filed the SAC on April 6, 2016. (Dkt. #93-95). Defendants filed their motion to dismiss the SAC on May 6, 2016. (Dkt. #96-98). Before filing his opposition to Defendants' motion, Plaintiff filed a Motion to Strike the three appendices attached to that motion. (Dkt. #100-01). Plaintiff then opposed Defendants' motion on June 6, 2016. (Dkt. #103). On June 28, 2016, Defendants filed their opposition to Plaintiff's motion to strike their appendices (Dkt. #107), as well as their reply in further support of their motion to dismiss the SAC (Dkt. #106). Plaintiff filed his reply in support of his motion to strike on July 15, 2016. (Dkt. #109).

         Defendants have filed motions for oral argument with regard to both their motion to dismiss the SAC (Dkt. #99), and Plaintiff's motion to strike Defendants' appendices. (Dkt. #108). The parties have also provided the Court with notices of supplemental authority - Plaintiff on September 22, 2016, and Defendants on January 27, 2017 - to which notices each opposing party has responded. (Dkt. #110-15). The Court will address all of these pending motions and filings below.


         Broadly speaking, Plaintiff alleges that Defendants made material misrepresentations in Wal-Mex's 2004, 2005, 2006, 2007, 2008, 2009, 2010, and 2011 Annual Reports (SAC, Ex. A-H); each report each was filed in April of the year following the year on it reports. (SAC ¶¶ 189-213). Plaintiff also raises claims based on Wal-Mex's website, Wal-Mart's December 8, 2011 Form 10-Q for third quarter of fiscal year 2012, and a series of Wal-Mex press releases and reports published by Wal-Mex's Audit and Corporate Practice Committees in January, February, March, and April of 2012. (Id. at ¶¶ 188-96, 214-25, 229; see also SAC Ex. H, X-DD). For the reasons described below, these claims must all be dismissed.

         A. Motions to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)

         The Court will consider later the pleading requirements applicable to securities class action complaints, and discusses here the general requirements of Federal Rule of Civil Procedure 12(b)(6). When considering a motion to dismiss under this rule, a court should “draw all reasonable inferences in [the plaintiff's] favor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks and citation omitted) (quoting Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009)). Thus, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In this regard, a complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference. See, e.g., Hart v. FCI Lender Servs., Inc., 797 F.3d 219, 221 (2d Cir. 2015) (citing Fed.R.Civ.P. 10(c) (“A statement in a pleading may be adopted by reference elsewhere in the same pleading or in any other pleading or motion. A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.”)).

         “While Twombly does not require heightened fact pleading of specifics, it does require enough facts to ‘[nudge a plaintiff's] claims across the line from conceivable to plausible.'” In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per curiam) (quoting Twombly, 550 U.S. at 570). “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). Moreover, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id.

         Several of Defendants' arguments concern the affirmative defense of timeliness. In a motion to dismiss brought under Rule 12(b)(6), “a defendant may raise an affirmative defense ... if [that] defense appears on the face of the complaint.” Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008) (citing McKenna v. Wright, 386 F.3d 432, 436 (2d Cir. 2004)). “The lapse of a limitations period is an affirmative defense that a defendant [typically] must plead and prove.” Id. (citing Fed.R.Civ.P. 8(c)(1)). However, courts permit defendants to raise timeliness arguments in a Rule 12(b)(6) motion where they appear on the face of the complaint, because “[t]imeliness is ‘material when testing the sufficiency of a pleading.'” Id. at 425-26 (quoting Fed.R.Civ.P. 9(f)); see also Gavin/Solmonese LLC v. D'Arnaud-Taylor, 68 F.Supp.3d 530, 536 (S.D.N.Y. 2014) (citing LC Capital Partners, LP v. Frontier Ins. Grp., Inc., 318 F.3d 148, 156 (2d Cir. 2003) (holding that when the relevant facts “can be gleaned from the complaint and papers ... integral to the complaint, resolution of the issue on a motion to dismiss is appropriate”)) (noting that while accrual begins at the date of discovery, and “[a]lthough the date at which discovery should have occurred can be a fact-intensive question, courts in this district often make this determination on a motion to dismiss”), aff'd, 639 F. App'x 664 (2d Cir. 2016) (summary order).

         B. Several of Plaintiff's Claims Must Be Dismissed as Untimely

         1. Timeliness Under the Sarbanes-Oxley Act of 2002

         a. 28 U.S.C. § 1658

         In the case of claims brought pursuant to Section 10-b and Rule 10b-5, the timeliness requirements are specified in Section 804 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), 28 U.S.C. § 1658. See, e.g., Merck & Co. v. Reynolds, 559 U.S. 633, 638 (2010).[10] This provision states that

a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934, may be brought not later than the earlier of - (1) 2 years after the ...

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