Mr. Coughlin Told Others Bogus Expenses Hid Plot Against Unions

Retailer Disputes His Claim

By James Bandler and Ann Zimmerman

Staff Reporters of THE WALL STREET JOURNAL

BENTONVILLE, Ark. – Last November, Thomas M. Coughlin, Wal-Mart Stores Inc.'s vice chairman, approached a lieutenant with an unusual request. He wanted Jared Bowen to approve around $2,000 in expense payments without any receipts.

Mr. Bowen, then a 31-year-old vice president, recalls that Mr. Coughlin briefly mentioned the money had been used for a "union project."

Concerned that the request seemed fishy, Mr. Bowen eventually alerted another executive, helping trigger an internal probe. Mr. Coughlin, who retired as an executive in January, abruptly resigned on March 25 from his board seat after Wal-Mart found what it said was a pattern of expense-account abuses and the use of false invoices to obtain reimbursements. Several other Wal-Mart employees also have been fired. The U.S. attorney for the Western District of Arkansas is investigating the matter.

Documents reviewed by The Wall Street Journal suggest that Mr. Coughlin, 55 years old, periodically had subordinates create fake invoices to get Wal-Mart to pay for his personal expenses. The questionable activity appears to involve dozens of transactions over more than five years, including hunting vacations, a $1,359 pair of alligator boots custom-made for Mr. Coughlin and a $2,590 dog pen for Mr. Coughlin's Arkansas home.

The 6-foot-4 Mr. Coughlin was a Wal-Mart legend -- a protégé and old hunting buddy of founder Sam Walton and for five years the second-highest-ranking executive in a company of more than a million employees. The suggestion that he might have betrayed the company he served for 27 years has shocked many at Wal-Mart and around Bentonville, where the world's biggest retailer is based.

For a man of Mr. Coughlin's means -- his total compensation topped $6 million last year -- the alleged abuses seem surprisingly petty. In a terse announcement, Wal-Mart said it found questionable transactions totaling between $100,000 and $500,000.

The tale involves another mystery: the "union project." Mr. Coughlin told several Wal-Mart employees that the money was actually being used for antiunion activities, including paying union staffers to tell him of pro-union workers in stores, according to people familiar with the matter. The fake invoices, Mr. Coughlin told these people, were simply a roundabout way of compensating him for out-of-pocket expenses in his antiunion campaign.

If Mr. Coughlin did pay union staffers for information, it would represent a criminal offense under the federal Taft-Hartley Act and ratchet up debate over the retail giant's labor policies. Wal-Mart has vigorously opposed unions since the time of Mr. Walton, who founded the company in 1962. That stance has roiled the retail industry as competing companies with unionized workers have tried to slash wages and benefits in an attempt to keep up with Wal-Mart's rock-bottom prices.

People familiar with the matter say that Mr. Coughlin is expected to use the "union project" as part of his defense to the charges about misappropriation of funds. These people give an explanation that wouldn't necessarily involve criminal activity: The payments went to former, rather than current, union people who had information about union activities at Wal-Mart. Even such payments, if made, could raise legal questions. According to Fred Feinstein, the former general counsel of the National Labor Relations Board, they could violate the National Labor Relations Act and carry civil penalties.

However, it remains unclear whether any payments were made or whether the union project existed. It is possible that Mr. Coughlin's talk of antiunion work was a cover story to conceal misuse of Wal-Mart funds for personal or other purposes.

Wal-Mart's director of corporate communications, Mona Williams, said in a statement yesterday that the company conducted a "thorough internal investigation" of the assertions about union payments and "found no evidence whatsoever to support it. To the contrary, the evidence shows that corporate funds were misappropriated and used for the personal benefit of specific individuals."

Ms. Williams also said: "Neither Mr. Coughlin nor anyone else at Wal-Mart was ever authorized by the company to make payments to anyone about union activity." She said the company reported the assertion about union payments to the U.S. attorney and asked for an investigation. Ms. Williams said Wal-Mart wouldn't comment beyond the statement.

Mr. Coughlin couldn't be reached for comment. In a statement, his lawyers, William W. Taylor III and Blair G. Brown, said: "Mr. Coughlin did not seek nor obtain any improper reimbursements from Wal-Mart." And they criticized Wal-Mart for not providing Mr. Coughlin with any documents related to the case.

"It is unfair to Mr. Coughlin, after his many years of service to Wal-Mart, for the company to refuse to provide him with the very documents it has publicly said are questionable," the lawyers' statement said. "Mr. Coughlin believes that Wal-Mart should be as interested as he is in a full and fair investigation of the matter. Preventing him from seeing the documents not only prevents him from defending himself, it also assures the investigation will be one-sided."

When Mr. Coughlin resigned, Wal-Mart cited "alleged unauthorized use of corporate gift cards" as one explanation. According to people familiar with the matter, Mr. Coughlin had subordinates obtain free Wal-Mart gift cards, which he used to shop at Wal-Mart stores. It's not clear how much money was involved in this activity or whether it had anything to do with the supposed union project.

Mr. Coughlin at one point was considered a candidate to become Wal-Mart's chief executive. As the No. 2 man, he ran the U.S. retail arm of the company. When he visited individual stores, employees often asked him for his autograph.

Mr. Coughlin and his wife, Cynthia, who live on a 2,000-acre ranch about 10 minutes outside Bentonville, are well-known donors to charitable causes. In downtown Bentonville, a new 38,000-square-foot library is being named after the Coughlins.

Common Touch

The son of a former Cleveland police officer, Mr. Coughlin began his career at Wal-Mart in 1978 as director of loss prevention. He later played a key role helping Mr. Walton build up the company's Sam's Club warehouse chain, often spending the better part of each week on the road with the company founder. The two men frequently went hunting together.

Mr. Coughlin also had Mr. Walton's common touch, sending store workers birthday cards and always stressing to colleagues that no matter how big Wal-Mart got, they should listen to store employees, because they were closest to customers. "He was the one executive who always made the associates feel like he was one of us," says Jimmie Howell, a 10-year Wal-Mart veteran in Tifton, Ga.

Mr. Coughlin was an outspoken critic of corporate chicanery. "Anyone who is taking money from associates and shareholders ought to be shot," he told the Cleveland Plain Dealer in 2002. "That greed will catch up to you."

Mr. Coughlin embraced another longtime Wal-Mart tradition: antiunionism. Led by the United Food and Commercial Workers International Union, labor organizers have tried for years to unionize Wal-Mart's U.S. workers, who currently number 1.3 million, but they have met with fierce and well-organized opposition. Whenever Wal-Mart headquarters gets word that union sentiment is growing in one of its stores, it quickly dispatches a "labor team" to the site. A Wal-Mart spokeswoman says the team, which includes a company lawyer, makes sure that store managers obey laws on organizing.

A group of meatcutters at a Wal-Mart in Texas voted to unionize in 2000. Several weeks later the retailer announced it was introducing a new nationwide policy of stocking only prepackaged beef and would no longer need butchers. This month, Wal-Mart is set to close a store in Canada that voted to unionize. Wal-Mart says the store is not profitable.

Asked if the United Food and Commercial Workers have any knowledge of Mr. Coughlin paying current or former union members for information, UFCW spokesman Greg Denier said: "Right now we have no evidence of that."

John Tate, a retired labor lawyer for Wal-Mart who is credited with many of the company's early victories against organized labor, says he worked closely with Mr. Coughlin to defeat several attempts to unionize Wal-Mart stores. In one instance during a union election, Mr. Tate recalls he and Mr. Coughlin personally put up posters around the workers' coffee-break area, depicting union corruption and abuses. Mr. Tate, who retired from Wal-Mart in the early 1990s, says he doesn't believe payments have ever been made by Wal-Mart to union workers.

One person Mr. Coughlin relied upon in his alleged deceit was a deputy, Robert Hey, according to people familiar with the matter. Mr. Hey's duties included arranging payment for vendors. Mr. Hey was recently fired from his vice president's job as part of Wal-Mart's internal probe. He declined to comment.

According to people familiar with his account, Mr. Hey has said that he was first told by Mr. Coughlin about the "union project" in the late 1990s. Mr. Coughlin would explain to Mr. Hey that he had made payments to people inside an unidentified union to gather information on pro-union Wal-Mart workers. Because Mr. Coughlin couldn't directly bill Wal-Mart for such sensitive costs, he wanted to be reimbursed indirectly by having Wal-Mart pay some of his personal expenses, according to people familiar with Mr. Hey's account.

In some cases, the account continues, Mr. Coughlin would forward a bill for something he had bought personally. Mr. Hey or a subordinate would then create a dummy invoice for the item, making it appear that a vendor was billing Wal-Mart for a legitimate business expense. Mr. Hey would attach the phony invoice to a Wal-Mart "request for check" form, asking for payment to the vendor. In most cases the dollar sums for the fake invoices appear to be identical to the real ones down to the penny.

Only a few documents reviewed by the Journal contain copies of checks. However, according to people familiar with his account, Mr. Hey has said he believes Wal-Mart typically cut checks as requested. He has said he went along with the maneuver because Mr. Coughlin was a powerful executive and he was worried he'd be fired.

John Everett, Mr. Hey's lawyer, declined to discuss any liability Mr. Hey might face for his actions. "I can say at the end of the day, I'm confident that the investigation will show he followed instructions and did what he was told to do," Mr. Everett said.

Later, Mr. Hey started a handwritten ledger. According to a person familiar with the matter, the purpose of the ledger was to make sure the reimbursements were matching the amounts Mr. Coughlin had supposedly spent on union matters. Titled "Current Expenses," the ledger records items running from March to November 1999. It does not mention the word "union." The ledger lists 16 reimbursements, ranging from $85 for "Norm the Tire Man" to $6,500 for "Drews Guide Service," a hunting-guide service.

Boot Prints

One item mentioned on the ledger is a $1,359 payment from Wal-Mart to Kimmel Boot Co. on April 22, 1999.

Eddie Kimmel, owner of the Comanche, Texas, bootmaker, recalls getting a call from a Wal-Mart executive, Terry Pharr, asking him to craft Mr. Coughlin a pair of boots made from hornback alligator skin and providing Mr. Coughlin's size information. When the boots were complete, Mr. Kimmel says he shipped them to Mr. Pharr's Lowell, Ark., home on April 12. The documents contain a bill addressed to Mr. Coughlin, care of Mr. Pharr, for $1,359.50.

Not long after, someone at Wal-Mart created an invoice purporting to be from Kimmel Boot. It listed "five boots/shoes samples" at $271.90 apiece, totaling $1,359.50. Wal-Mart frequently obtains samples of pricey products in order to create cheaper alternatives. However, Mr. Kimmel says he never made boot or shoe samples for Wal-Mart. Mr. Kimmel says he was paid, but doesn't recall by whom.

Wal-Mart fired Mr. Pharr in December for a matter it said was unrelated to the investigation of Mr. Coughlin. He could not be reached for comment.

It appears that some Wal-Mart money went to the care of Mr. Coughlin's hunting dogs. In October 1999, an employee of Priefert Manufacturing, a Mt. Pleasant, Texas, ranch equipment maker, sent a fax to a Wal-Mart employee at his office saying he would be pleased to accommodate "your executive's request" for a steel dog pen at the dealer price of $2,589.64. The letter did not specify which executive made the request.

A couple of months later, an employee at Wal-Mart created an invoice for the same amount. The explanation for the requested payment to the canine fence builder: hotel, meals and mileage.

David Fillebrown, a sales and marketing official at Priefert, says he installed the dog enclosure at Mr. Coughlin's ranch. "Normally we don't do installation, but I personally did these," he says, adding that he felt the extra service might help get his firm's products into Sam's Club, the membership warehouse chain owned by Wal-Mart. "We were paid on a Wal-Mart check," Mr. Fillebrown says.

Asked if anything seemed odd about installing a fence paid for by Wal-Mart at a residence, he says: "There wasn't anything [that] seemed suspicious to us. We're kind of dumb country people down here. We take people for their word." He says Priefert never did get any Sam's Club business.

Among more than 100 pages of documents reviewed by the Journal, there are only a few references to union activity of any kind. One October 2002 document lists the contact information for an executive at a hunting-gear clothing firm, Sammie Knight. Handwritten on it is a note, apparently from Mr. Hey: "Tom asked me to send $10,000 in two payments to Sammie Knight for stuff the 'union' people in Vegas needed."

At the time, there was a big drive by the United Food and Commercial Workers union to organize Wal-Mart stores in Las Vegas. It failed.

Also included in the documents are copies of apparently phony invoices that instruct Wal-Mart to pay Mr. Knight's company, Haas Outdoors Inc. of West Point, Miss. Mr. Knight, the company's vice president of sales and licensing, didn't return repeated messages seeking comment.

Another note that appears to be in Mr. Hey's handwriting, dated November 2002, says: "Tom requested $8722 for union work." Underneath is another notation received three days later about a $10,500 bill for "hunting truck: flatbed and dog boxes."

Between 2001 and 2004, documents indicate that Wal-Mart may have subsidized hunting trips for Mr. Coughlin, an avid game hunter. During this period, documents show Mr. Coughlin contracted for a hunting lease on the storied Kenedy Ranch in southern Texas. Each January and July, Charles W. Gordon IV, whose El Alazon Corp. in Corpus Christi made the hunting-lease contract with Mr. Coughlin, sent the Wal-Mart executive a letter to his office requesting "a semi-annual lease payment" of $6,500.

On at least three occasions, shortly after Mr. Coughlin received these requests, someone in Mr. Hey's office created invoices with an El Alazon corporate logo for the same amount but addressed to Wal-Mart. The written explanation for the expenses varied.

One invoice, dated July 22, 2002, said the payment request was for "facilities for Dallas meeting...room, mileage, meals." Another dated Jan. 31, 2003, said the ranch was used by "contest winners" of a seminar for sporting-goods department managers. An Aug. 15, 2003, invoice said the ranch was used for a "summer hunt" by unnamed department managers and winners of an unexplained contest. It isn't clear whether any of the meetings or seminars took place.

Mr. Gordon of El Alazon did not return repeated calls seeking comment.

Mr. Hey got a promotion and in 2004 Mr. Bowen took over his job. Mr. Bowen says he started with the company at age 19 as a cashier at a Flagstaff, Ariz., store earning $4.50 an hour.

Sitting at a picnic table near an Arkansas lake on a recent evening, Mr. Bowen recalls regarding Mr. Coughlin with a mix of fear and admiration. "He is a larger-than-life individual," Mr. Bowen says.

Last December, Mr. Coughlin announced that he would retire in early 2005. He had suffered a coronary blockage in 2003 and was a member of an old guard at Wal-Mart that was increasingly being supplanted by outsiders and younger executives appointed by Lee Scott, a logistics expert who became CEO in 2000.

In late November 2004, a few months before his retirement, Mr. Coughlin approached Mr. Bowen with a request that the younger executive says made him nervous. "He told me some expenses were coming through for the union project and just to approve them," Mr. Bowen says. The request, he says, involved about $2,000 of expenses for one of Mr. Coughlin's subordinates, ostensibly for travel costs such as automobile mileage and meals.

But there were no receipts, which Mr. Bowen says was unusual at the tight-fisted company. And Mr. Bowen says he didn't know anything about a union project. "They were so bogus," he says. "Meals, mileage, no receipts, nothing." Mr. Bowen decided to sit on the request for a while.

At a meeting in January in Kansas City, Mr. Coughlin told Mr. Bowen that the expenses hadn't been approved, according to Mr. Bowen. "Go approve them," he remembers Mr. Coughlin saying. Mr. Bowen was scared, partly because several fellow workers in his group had been fired the previous year in an apparently unrelated ethics scandal.

Soon after, Mr. Bowen says he went to a top Wal-Mart executive. "There's some questionable expenses y'all might want to look at," Mr. Bowen recalls saying. Wal-Mart, Mr. Bowen says, quickly called in corporate security and opened its probe.

Last week, Mr. Scott, the Wal-Mart chief executive, admonished his employees in a companywide broadcast, "If someone asks you to do something that you know is wrong -- whether that is a buddy or a supervisor or Lee Scott -- you must have the courage to say, 'No.' We all have to do this, no matter our role or position within the company."

The following day, Mr. Bowen was fired. He says he doesn't understand why, given that he blew the whistle on the expense payments. He says Wal-Mart officials told him during the investigation they believed he wasn't being forthcoming. The official explanation came to him this week: "a general lack of confidence."