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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.”

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