WILMINGTON, Del. – Walmart followed the rules when it didn’t disclose a possible criminal investigation – which never happened – to investors, a federal appeals court has ruled.
Shareholders sued when the company’s value dropped in 2020, after a news article revealed an abandoned investigation by federal prosecutors over the Controlled Substances Act. But the U.S. Court of Appeals for the Third Circuit ruled last week Walmart never had to disclose the possibility of a criminal proceeding.
“Walmart did what it had to do to avoid making (statements) misleading – it did not disclose an investigation in its early stages whose contours were unclear; once it learned an indictment could come, it immediately arranged a meeting with prosecutors to clarify its scope and probability; and once the contours of the investigation were clearer, Walmart disclosed it was under investigation, what it was under investigation for, and that it faced possible losses relating to that investigation whose extent it could not estimate,” the court ruled.
The Drug Enforcement Agency raided a Walmart in Texas in December 2016 while investigating two doctors prescribing a large number of opioids. Walmart was now alerted that it was part of a criminal investigation, which led to an email search warrant in March 2017.
The following year, assistant U.S. Attorney Heather Rattan notified Walmart of intention to indict the company. Prosecutors threatened to bring charges unless Walmart agreed to a billion-dollar settlement, the ruling says.
But neither happened. Walmart defended itself in a meeting. The Department of Justice in August 2018 told Walmart it was declining to bring charges, though a civil lawsuit was later filed.
While the criminal probe had gone on, Walmart had submitted 13 securities filings that investors say should have disclosed it. Those statements referenced the ongoing opioid case in Ohio federal court but not the Texas investigation.
A disclosure after Rattan had revealed her intent to bring charges added: “The Company has also been responding to subpoenas, information requests and investigations from governmental entities related to nationwide controlled substance dispensing practices involving the sale of opioids. The Company can provide no assurance as to the scope and outcome of these matters and no assurance as to whether its business, financial condition or results of operations will not be materially adversely affected.”
A Delaware federal judge rejected the idea Walmart had misled its investors, and the Third Circuit agreed.
“(O)ne prosecutor stating her intent to bring an indictment did not, on these facts, transform the investigation into a ‘reasonably possible,’ ‘material’ liability,” it wrote.
“The same uncertainties surrounding the investigation that existed before the communication continued to exist after and until Walmart was able to meet with prosecutors, despite Walmart’s proactive attempts to resolve those uncertainties.”
