Sidley Austin Sued for Malpractice in Rare FCPA Controversy

06/15/12

On June 6, in a rare action of malpractice against a law firm involving FCPA diligence, Watts Water Technologies Inc sued Sidley Austin. Watts is a public company that suffered sanctions under the FCPA and has to settle a U.S. foreign bribery case last year. And according to the records, it seems that the company is correct in suing the law firm.

Last October, Watts settled for $3.7 million in sanctions to resolve SEC allegations that its new Chinese acquisition paid bribes to Chinese government officials for bagging contracts. Watts now alleges that the fault was of the law firm which vetted the acquisition of the Chinese company in 2005.

In 2005, Sidley Austin vetted the acquisition of Changsha Valve Works and billed Watts $200,000 for due diligence. However, though records show that Sidley discovered a document detailing the written policy of Changsha Valve Works in paying kickbacks to Chinese government officials for securing contracts, the law firm did not flag the document or bring it to the notice of Watts.

In 2009, FCPA violations based on the kickback policy was noticed by the management of Watts and the company hired Paul Hastings to conduct an investigation on the kickback policy. When Sidley turned over the original due diligence files, the kickback policy was found in there. On an interview by Paul Hastings, Sidley lawyer, Zhengyu Tang admitted that the policy was a “red flag” that potentially should have been disclosed. Watts submitted in the lawsuit that had the company known about the kickback policy in 2005, it would not have made the $9 million acquisition.

The lawsuit, once again raises the issue of confusion over the application of the FCPA. Business groups across the country including the Chamber of Commerce are already running campaigns to amend the law, alleging that there was a lack of clarity that killed business. This lawsuit proves the case of business groups where a company had to shell out millions of dollars over conduct which even one of the best law firms could not detect by due diligence.

The FCPA does not only make companies and their overseas employees accountable, but also liable for the conduct of acquired companies. According to business groups, this kills growth and international expansion of American companies.
The case is Watts Water Technologies, Inc. v. Sidley Austin LLP, Superior Court for the District of Columbia, Case No. 0004847-12.