Of Note From the Tyco Enforcement Action
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Yesterday’s post (here) went long and deep as to the Tyco enforcement action. This post continues the analysis by highlighting additional notable issues.
The Tyco Enforcement Action Should Be An FCPA Practitioners New Best Friend
During the negotiation phase of resolving an FCPA enforcement action with the DOJ and/or the SEC, a topic that often comes up, and an analysis that an FCPA practitioner frequently performs, is comparing the conduct at issue in the current case to prior enforcement actions. The enforcement agencies typically dismiss such comparative efforts by practitioners by saying that every enforcement action (and negotiation) is unique and that what the agencies did in one enforcement action is not binding in another. On the flip side, and a position I think is imminently reasonable, is that the enforcement agencies ought to be bound by some consistency in enforcement approaches.
If so, the Tyco enforcement action should be the FCPA practitioners new best friend.
For starters, this enforcement action involved a company that settled a wide-ranging fraud action in 2006 – one that involved a material FCPA component (see here for the prior SEC action). In that 2006 action, Tyco was permanently enjoined from, among other things, future FCPA violations. (For more on so-called “obey the law injunctions – see this recent guest post and this prior post).
The government bluntly stated in this week’s enforcement action that certain of the misconduct occurred even after the 2006 injunction. In addition, and per the government, the alleged misconduct in this week’s enforcement action was carried out by several different methods, the conduct occurred over a lengthy time period and involved conduct in approximately 25 countries.
Even so, against this backdrop of an injunction being violated and widespread misconduct in approximately 25 countries, Tyco was offered a non-prosecution agreement by the DOJ and the government did not require an imposition of a corporate monitor.
Should an FCPA practitioner in the future be faced with anything other than a DOJ NPA or should a monitor be insisted upon by the government, the Tyco enforcement action should be your new best friend.
Assessing Tyco’s Culpability
Yes, as noted above, Tyco is now an FCPA “recidivist.” By my count, it has now joined ABB, Baker Hughes, and General Electric in that category.
Yet in reading the Tyco enforcement action, I am hardly surprised nor shocked. The company is a diversified global company operating in more than 60 countries with more than 100,000 employees worldwide. The vast majority of the conduct at issue in the enforcement actions allegedly occurred between 2000 and 2006.
Furthermore, there is no allegation or suggestion that Tyco (the parent company entity) knew of or participated in the improper conduct. For instance, the closest Tyco connection alleged is in the SEC’s complaint concerning conduct in Turkey. However, even there, the SEC only alleges a dual officer structure between the relevant subsidiary and executive officers while at the same time alleging that there was “no indication that any of these individuals [the dual officers] knew of the illegal conduct.” In other respects, the resolution documents allege or suggest that various indirect subsidiaries took steps to conceal the conduct at issue or circumvent Tyco’s internal controls.
I’ve said before and I will say again (based on nearly a decade of FCPA practice experience conducting FCPA internal investigations around the world) that if every large multi-national company with diverse global business units, with tens of thousands of employees scattered across the world, would hire FCPA counsel to do a complete and thorough world-wide review of the company’s operations, given the current enforcement theories, including the standardless books and records and internal controls theories of enforcement, 95% of companies would find problematic conduct (the other 5% of companies either hired counsel not well versed on the current enforcement theories and/or counsel did not look hard enough).
It Takes A While … Just To Negotiate
As noted in this previous post regarding Pfizer, the gray cloud that is FCPA scrutiny can hang over a company for a long time. On this issue, it is interesting to note that Tyco’s most recently quarterly filing stated that the company began its negotiations with the DOJ and SEC in February 2010.
The FCPA As An M&A Issue
The $26 million in combined fines and penalties will not be borne entirely by Tyco and its shareholders. The FCPA frequently finds its way into corporate divestitures and other transactions.
On this note, Tyco’s most recent quarterly filing stated as follows concerning previously spun off business units and now separate companies. “Covidien and TE Connectivity agreed, in connection with the 2007 Separation, to cooperate with the Company in its responses regarding these matters. Any judgment required to be paid or settlement or other cost incurred by the Company in connection with the FCPA investigation matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of the Company to Covidien and TE Connectivity, respectively, and provides that the Company will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among the Company, Covidien and TE Connectivity.”
In addition, as noted in the NPA, one of Tyco’s business units is poised to be spun-off to Pentair Inc. later this week. The NPA states as follows. “Tyco agrees that if this separation and merger occur during the term of this Agreement, Tyco shall, for any business entities, operations, or units involved in the conduct [at issue] and included in the spin-off and merger, including provisions in any separation agreement binding the relevant and culpable entities to the [compliance] obligations [set forth in the NPA]. Tyco shall no longer be responsible for ensuring compliance by any separated entities, operations or units with the obligations described in the [NPA].”
More Foreign Healthcare Providers as “Foreign Official”
This recent post traced the origins and prominence of the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA. Add the Tyco enforcement action to the list as the enforcement action included conduct involving Chinese health care providers, Saudi Arabian health care providers, and Polish health care providers.
With the Tyco action on the list, 5 of the 9 (55%) core corporate enforcement actions this year have been based, in whole or in part, on this theory.
More Chinese Design Institutes
The number of FCPA enforcement actions involving Chinese design institutes (an entity category that has given many an FCPA practitioner a headache trying to figure them out) has grown with the Tyco enforcement action. As noted in this previous post concerning Watts Water Technologies, other enforcement actions that have involved, in whole or in part, Chinese design institutes include the following: Rockwell Automation (here), ITT (here), and Avery Dennison (here).
Scrutiny Alerts
This post provides updates on three company’s FCPA scrutiny: Kraft, Brookfield Asset Management, and H-P.
Kraft
In February 2010, Kraft acquired Cadbury, and with that, Cadbury’s Baddi, India facility which churns out various chocolates. Producing chocolates for the mouths of the masses is, all things considered, a low FCPA risk activity. But alas, company employees had to interact with India’s legendary bureaucracy in regards to licenses, permits, and excise tax issues. Therein was the FCPA risk as detailed in this recent Forbes India article.
In its most recent quarterly filing (here) the company stated as follows.
“A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010 we began reviewing and adjusting, as needed, Cadbury’s operations in light of U.S. and international standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities. As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a Cadbury facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are cooperating with the U.S. and Indian governments in their investigations of these matters.”
Brookfield Asset Management
The Wall Street Journal reported last week (here – “Brookfield Faces Brazil Accusations”) that “Brazilian authorities are investigating allegations that an executive at Brookfield bribed Sao Paulo officials to secure permits required for renovating three shopping malls in that city.” According to the article, the allegations were made by the former CFO of a Brookfield subsidiary in Brazil who was fired in 2010, and who the company has sued in Brazil for embezzling funds. The article further suggests that the former CFO has contacted the SEC about the matter.
Brookfield (here) is “global alternative asset manager with over $150 billion in assets under management … with a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity.” The company’s common shares trade on three stock exchanges, including the New York Stock Exchange.
H-P
As noted in this previous post, H-P has been under FCPA scrutiny since April 2010. Last week, the Wall Street Journal reported here (“German Prosecutors Name H-P in Bribery Indictment of Employees”) that German prosecutors named H-P in a criminal bribery case against one current and two former employees. According to the article, the “German prosecutors asked the court to attach H-P to the case, a motion that could lead to fines and other penalties if the court finds that the company benefited from the crime.” In the article, a H-P spokeswoman said current and former employees had been indicted on charges of “alleged conduct that occurred nearly 10 years ago by a former H-P company” and that H-P had been “only named as a side participant in the proceedings,” not indicted, and was fully cooperating with authorities.
The company’s most recent quarterly filing stated as follows.
“The German Public Prosecutor’s Office (“German PPO”) has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor’s Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an information technology network. The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. In addition to information about the Russia GPO deal, the U.S. enforcement authorities have requested (i) information related to certain other transactions, including transactions in Russia, Serbia and in the Commonwealth of Independent States (CIS) subregion dating back to 2000, and (ii) information related to two former HP executives seconded to Russia and to whether HP personnel in Russia, Germany, Austria, Serbia, the Netherlands or CIS were involved in kickbacks or other improper payments to channel partners or state-owned or private entities. HP is cooperating with these investigating agencies.”
Friday Roundup
A focus on entertainment and calling out FCPA / Bribery Act Inc. and a recent disclosure from a company that is part of FCPA history. It’s all here in the (slimmer than normal) Friday roundup.
Recent Comments From The Director of the U.K. SFO
The briberyact.com previously mentioned here recent comments made by David Green (Director of the U.K. Serious Fraud Office) in a Daily Mail article (here) that “mainstream corporate entertaining” is of little concern to the SFO. Green states in the article as follows. “We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the ‘serious champagne office.'”
The same can not always be said of the DOJ or SEC. Although such seemingly minor corporate entertainment expenditures have never been the sole focus of an enforcement action, several enforcement actions have included such allegations. For instance, the UTStarcom enforcement action (see here for the prior post) contained allegations about a $600 bottle of wine. The Data Systems and Solutions enforcement action (see here for the prior post) contained allegations regarding a Cartier watch. The IBM enforcement action (see here for the prior post) contained allegations about a camera. The RAE Systems enforcement actions (see here for the prior post) contained allegations about kitchen appliances, business suits, and high-priced liquor. Numerous other examples abound. One must assume that the enforcement agencies included such allegations in the resolution documents for a reason, not just to fill up paper.
Alexandra Wrage (President of Trace International) noted the U.K. / U.S. irony in this recent piece for Corporate Counsel. “[W]hereas the U.S. law permits these expenditures [facilitation payments and reasonable entertainment expenses], within reason, and then enforces when companies overstep, the U.K. prohibits them, but assures the public that they won’t be prosecuted.”
Green’s comments to the Daily Mail were also notable for his calling out of FCPA (or as the case may be Bribery Act) Inc. The Daily Mail article notes as follows. “[Green] criticised American law firms that had taken advantage of the uncertainty. ‘It is in their interest to focus attention on the Bribery Act. They put up talking heads and arrange conferences. It is a huge industry.’” Green’s comments are similar to those noted in this prior post by Kenneth Clark (the U.K.’s anti-corruption champion) who stated, in the House of Commons, leading up to the Bribery Act as follows. “I hope to put out very clear guidance [regarding the Bribery Act] to save [businesses] from the fears that are sometimes aroused by the compliance industry, the consultants and lawyers who will, of course, try to persuade companies that millions of pounds must be spent on new systems that, in my opinion, no honest firm will require to comply with the Act.”
Harris Corp.
As previously noted in this Wall Street Journal Corruption Currents post, Harris Corporation disclosed as follows in its recent annual report.
“[I]n April 4, 2011, we completed the acquisition of Carefx and thereby also acquired its subsidiaries, including in China (“Carefx China”). The consolidated revenue of the Carefx China operations for fiscal 2012 was approximately $1.4 million, or less than 0.1% of our consolidated revenue. In connection with our integration activities and the subsequent audit of the financials of the Carefx China operations, we became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly. In response, with the concurrence of our Audit Committee, we initiated an internal investigation, with the assistance of outside legal counsel, to determine whether violations of the FCPA potentially occurred. In the course of our investigation, we learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers and potential customers. Although our investigation is not complete, we have already taken remedial actions related to the Carefx China operations, including changes to internal control procedures, termination of the gift-giving practice, additional compliance training and termination of the employment of certain individuals. The preliminary results of the investigation have been disclosed to our Audit Committee, Board of Directors and auditors, and we have also contacted the U.S. Department of Justice and the SEC to voluntarily disclose that we are conducting the investigation and to advise that it is our intent to fully cooperate with any investigation that they may conduct with respect to this matter. We cannot predict at this time any regulatory action that may be taken with respect to this matter or any other potential consequences that may result. However, based on the information available to date, we do not believe that this matter will have a material adverse effect on our financial condition, results of operations or cash flows.”
As noted in this previous post, Harris Corp. is part of FCPA history. It is believed to be the first, and to this day only, publicly traded company to have put the DOJ to its burden of proof at trial. As noted in the post, Harris Corp. prevailed in the enforcement action (1990-1991). I noted in the previous post as follows. If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.
If the conduct Harris recently disclosed gives rise to an enforcement action, will Harris likewise this time around put the DOJ to its burden of proof? Even if it has valid legal and factual defenses, not a chance. NPAs and DPAs exist today and resolving FCPA inquiries is often more about cost-beneft / risk-reward, than law and facts.
*****
A good weekend to all.
Friday Roundup
The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality. It’s all here in the Friday roundup.
The manufactured Africa Sting case may be over, but it effects are still being felt.
Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case. The company stated in its recent quarterly filing (here) as follows.
“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”
As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.
Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson. The company disclosed in its most recent quarterly filing (here) as follows.
“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”
Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.
Orthofix
This previous post discussed the July enforcement action against Orthofix International. As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal. The information (here) was recently unsealed. In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.” “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”
IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.
Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)
Mexican Official 2 – the purchasing director of Magdelena de las Salinas
Mexican Official 3 – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)
Mexican Official 4 – a sub-director of IMSS
According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”
Under the heading “Internal Controls” the information alleges, among other things, as follows. “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca. Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca. Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A. Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”
The information charges one count of violating the FCPA’s internal control provisions.
Checking In On Wal-Mart
During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.
Spitzer of course was right.
During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows. “Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.” Later in the call, the following was said. “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”
In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.” According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”
Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post). As indicated in this recent press release and this recent letter the lawmakers are growing impatient. In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.
“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.
During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.
In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”
Pipeline Report
Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.
NCR
Global technology company NCR Corp. recently disclosed here as follows.
This previous post regarding the recent Pfizer enforcement action raised the following question(s).
Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?
The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety. One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).
The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative. The article states as follows.
“[The conduct at issue in the enforcement action] puts the safety of consumers at risk. If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide. The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”
Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed. Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.
“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce. All citizens and companies become subject to the Justice Department’s essentially unfettered power. Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game. It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”
*****
A good weekend to all.
Sidley Responds To Malpractice Claims – “It Is Frankly Amazing That Watts Comes To This Court Seeking A Recovery From Sidley”
This previous post discussed Watts Water Technologies complaint filed in Superior Court for the District of Columbia against Sidley Austin LLP in connection with merger due diligence in China that Watts claims was deficient and gave rise to its FCPA scrutiny.
Recently Sidley filed this answer and this motion for summary judgment.
The answer contains a preliminary statement which states as follows.
“In this case, an admitted corporate wrongdoer that was required to disgorge illegal profits and pay penalties to the federal government for violating a federal anti-bribery law seeks to recoup the fruits of its wrongdoing and penalties from its former counsel, based on erroneous allegations that counsel were negligent. Watts cannot shift the consequences of its Foreign Corrupt Practices Act (FCPA) violations to Sidley for multiple reasons, including the following: Sidley was engaged to perform certain, specified due diligence tasks—not to include FCPA review—in connection with Watts’ purchase of specified assets from Changsha Valve Works; Sidley’s legal work on the agreed-upon due diligence was of the highest quality and exceeded professional standards; Watts mistranslates and mischaracterizes Chinese-language documents to support its erroneous claim; Watts ignores that its Assistant General Counsel was provided written notice of the so-called “kickback policy” in advance of Watts’ decision to proceed with buying Changsha Valve Works’ assets; and Watts, as a matter of law, is solely responsible for Watts’ own illegal conduct in China in the years following Sidley’s limited engagement. Under these circumstances, no basis exists for Watts to come to this Court seeking a recovery from Sidley.”
The summary judgment motion states, among other things, as follows.
“Watts’ negligence theory against Sidley stems from the fact that Watts had hired Sidley back in 2004 to conduct specified due diligence tasks—none of which included FCPA compliance—at the old Changsha Valve, the company that sold its assets to Watts in 2006. Watts alleges that Sidley negligently failed to detect and report that Changsha Valve had bribed government officials. According to Watts, if Sidley had only reported Changsha Valve’s bribery to Watts in 2004 or 2005, then Watts would not have engaged in bribery at Watts’ own subsidiary from 2006 to 2009, and would have maintained adequate books and records. The argument is preposterous. For one, Deloitte & Touche Corporate Finance Ltd., which conducted financial due diligence for Watts at Changsha Valve, specifically identified and reported Changsha Valve’s so-called “kickback policy” to Watts in writing on November 19, 2004. Watts’ then-Assistant General Counsel wrote in a memorandum, long before the Changsha Valve deal was concluded, ‘I have reviewed the . . . draft Financial Due Diligence report . . . by Deloitte.’ Yet Watts went ahead with the conduct described in the Complaint despite Deloitte’s written report. Under these circumstances, it is frankly amazing that Watts comes to this Court seeking a recovery from Sidley.”