The market hates uncertainty. It also hates lawsuits, book cooking, and scandals.
In the wake of the FIFA bribery fiasco, it is about to get all four.
For those who don’t know, FIFA is the governing body that represents the World Cup in soccer. It is the world’s most popular and lucrative athletic tournament.
The open secret is that FIFA is one of the most corrupt — if not the most corrupt — sports associations in the world.
The Swiss, in cooperation with the United States Department of Justice, just arrested a number of FIFA leaders and will extradite them to the U.S. They are charged with taking bribes of up to $150 million, laundering the money, not paying taxes, etc.
We are told this is just the beginning of the investigation.
Already, PR flaks of the corporate sponsors are spinning the news. Visa says it will reassess its sponsorship unless FIFA makes changes. Coca-Cola and Adidas have voiced concerns. And there are many more companies that will sink in this morass.
I’ll tell you more about that below. But first, let’s look at what happens to share prices after a company is caught red-handed.
Shares Die on Corruption
In 2012, Wal-Mart de Mexico, a highly successful business for Wal-Mart and one that contained 20% of all Wal-Mart stores, was indicted for systematically bribing Mexican government officials for years.
The bribes totaled more than $24 million and were paid to win permission to open new stores fast by avoiding Mexican laws.
The bribes were kept off the books and hidden from Wal-Mart’s global headquarters in Bentonville, Arkansas because they were disguised as normal legal bills.
The shares (OTC: WMMVY) got killed overnight:
Petrobras to Petrobust
You may remember Petrobras (NYSE: PBR) as the great Brazilian oil and gas developer who discovered the mother lode Tupi oil field.
The company was going to turn Brazil into a major oil exporter and a world power. There was talk of joining OPEC. Shares launched from $4 to $70 in 2008 at the peak of the party.
Times change. Now Petrobras is at the center of Brazil’s biggest corruption and money-laundering scandal. Federal prosecutors have indicted 30 executives at Brazil’s largest engineering firms for paying $3.7 billion in bribes. 28 powerful politicians were also named, as were two former Petrobras directors.
Lawsuits have been filed in a Manhattan federal court against Petrobras for cooking its books and failing to disclose kickback scams.
The shares got whacked, losing 75% of their value:
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Nike Caught in FIFA Scandal
There are a number of reports that Nike (NYSE: NKE) is involved in the FIFA bribe investigation.
CBS News reports:
The 161-page document released by the U.S. Department of Justice (DOJ) claims that a multinational sportswear company, headquartered in the U.S., used “bribes and kickbacks” in order to sign a sponsorship deal with the Brazilian national soccer federation in 1996.
It doesn’t name the firm, just calling it sportswear company A, but Nike’s own website states that the sports brand signed an apparel licensing deal with Brazil’s soccer team in the same year. Nike wouldn’t comment specifically on the implications spotlighted in the indictment but said that it was concerned about the “very serious allegations.”
NKE could drop fast if it is determined that bribes were kept off the balance sheet. Packs of New York lawyers are already sharpening their blades and making “Bo Knows Bribes” jokes.
This morning before the market opened, I recommended that my readers in Options Trading Pit buy some puts with the idea that bad news will send Nike much lower. As this goes to print, that trade is up 25%.
Other companies that might get snared by the DOJ investigation include Coca-Cola (NYSE: KO), Visa (NYSE: V), and Adidas (OTC: ADDYY), as well as some banks that may have laundered money.
The banks named in the investigation include: Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and HSBC (LSE: HSBA), as well as UBS (VTX: UBSG), Bank of America (NYSE: BAC), and Julius Baer (VTX: BAER).
Though the shares of large international banks have shaken off the effects of massive fines over the past year, you may wish to reduce exposure just in case.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
