On The Case

Walmart shareholders face hurdle in new opioid fraud class action

(Reuters) - Two plaintiffs' firms filed a shareholder class action against Walmart on Wednesday in federal court in Wilmington, accusing the company of misleading investors about its opioid prescription practices in filings with the Securities and Exchange Commission between 2016 and 2020.

The complaint, filed by the Rosen Law Firm and Farnan, alleged Walmart failed to inform shareholders that its pharmacies filled thousands of suspicious opioids prescriptions under a company policy that, according to the suit, kept pharmacists under pressure to fulfill orders instead of asking questions about prescribing doctors. The plaintiffs' firms claimed that the truth emerged on Dec. 22, when the Justice Department brought a sweeping enforcement action against the company, claiming Walmart committed thousands of violations of the Controlled Substances Act. The stock market reacted to the revelation of the alleged fraud, according to the complaint, by pushing Walmart’s share price down by $2.75 per share after DOJ filed its suit. The shareholder firms described the $2.75 decline, from $146.23 high on Dec. 22, as “precipitous,” although the drop was less than 2% of Walmart’s share price.

I have questions.

I should say first that Walmart denies the Justice Department’s allegations, arguing that the government’s flawed legal theory “unlawfully forces pharmacists to come between patients and their doctors,” and the DOJ’s suit is “riddled with factual inaccuracies and cherry-picked documents taken out of context.” A Walmart spokesman said the company also disagrees with the allegations in the new shareholder fraud class action. "We take these matters seriously," he said by email. We will defend this matter vigorously.”

My big doubt about the class action is its assertion that the Justice Department’s suit on Dec. 22 was a revelation to the market. Walmart itself revealed two months before the DOJ suit that it was under government scrutiny for its opioid prescription practices. The company filed an unusual declaratory judgment suit, in federal court in Sherman, Texas, seeking a judicial ruling that the government’s interpretation of the Controlled Substances Act was wrong. Walmart’s complaint disclosed that DOJ had previously contemplated a criminal case against the company – Walmart said the indictment threat was entirely unwarranted and was intended to extract a big payout to the government – and that even after ditching the prospect of criminal charges, the Justice Department was planning a civil enforcement action against the company.

Walmart filed that suit on Oct. 22. That day, its opening share price of $144.11 declined to a closing price of $143.03, although it was back up to nearly $144 by the opening of trading on Oct. 23. The market, in other words, did not react with particular alarm to Walmart’s disclosure that it was in DOJ’s crosshairs.

That could be because the market already knew, even by the time of Walmart’s declaratory judgment suit in October, that DOJ was scrutinizing Walmart’s opioid prescription practices. Pro Publica reported in March 2020 that Texas prosecutors had been investigating Walmart’s opioid dispensing protocols for two years and had tried to convince high-ups in Washington to bring a criminal case. Pro Publica’s story was published on March 25. Walmart’s share price declined more than $3 that day, from nearly $113 to an opening price on March 26 of $109.40.

After the Pro Publica story, three institutional investors demanded to see Walmart corporate records documenting the board’s knowledge of the company’s opioid dispensing practices as well as the board’s response to private and government investigations of those practices. The pension funds ended up suing in Delaware Chancery Court to obtain access to Walmart books and records. In October, Vice Chancellor Travis Laster ordered the company to turn over a broad swath of corporate documents to plaintiffs' lawyers from Bernstein Litowitz Berger & Grossmann, Labaton Sucharow and Berman Tabacco.

Walmart argued in the Delaware books-and-records case that it had disclosed its exposure to liability for its opioid prescription policies all the way back in 2018. In an SEC filing in June 2018, the company said it had “been responding to subpoenas, information requests and investigations from government entities related to nationwide controlled substance dispensing practices involving the sale of opioids.”

When I reported in October on the Walmart books-and-records case, I predicted that plaintiffs' lawyers were gearing up for a breach-of-duty case against the company’s board. The prospects for a fraud class action, I said at the time, seemed less attractive because the company’s share price didn’t respond dramatically to revelations of its potential liability for filling allegedly suspicious opioid prescriptions. So far, there’s been no breach-of-duty suit against Walmart board members. Lawyers from Bernstein Litowitz and Labaton didn’t respond to my emails asking about their plans.

I still think shareholders will have an uphill fight in a fraud class action in which they will ultimately have to show that Walmart’s alleged failure to disclose problematic opioid dispensing practices impacted the company’s share price. Between the March Pro Publica story that first revealed DOJ’s contemplation of criminal charges and the DOJ enforcement action in December, Walmart’s share price actually rose by $30. And since the DOJ suit, Walmart shares have generally traded within a narrow range of prices between $144 and $149 – slightly higher, if anything, than the share price before DOJ filed its enforcement action.

Laurence Rosen and Phillip Kim of The Rosen Firm didn’t respond to my email asking about when the alleged Walmart fraud was actually disclosed. And I know, initial shareholder fraud class actions are often a skeletal version of the amended complaint filed by lead counsel after the lead plaintiff selection process. It will be up to whomever is picked to head the case to develop a cogent theory of the alleged fraud’s impact on the market for Walmart shares.

I’m just saying that’s not going to be easy.