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.”

That in a nutshell is the substance of Watts Water Technologies recent complaint (here) filed in Superior Court for the District of Columbia against Sidley Austin LLP.  See here for the original reporting by Reuters.

In summary fashion, the complaint alleges as follows.

“When Watts was considering the acquisition of a Chinese company, Watts hired Sidley as its attorneys to perform legal due diligence with respect to the potential acquisition so that Watts could evaluate the legal risks associated with the acquisition and decide whether to proceed.  Sidley’s legal representation required its attorneys to thoroughly investigate the target company and identify all potential legal risks and liabilities that Watts might be exposed to or acquire if it purchased the target company.  Sidley was aware that these potential liabilities and legal risks could include possible violations of the FCPA.  In the course of its legal due diligence, Sidley uncovered a document demonstrating that the target company had a written ‘kickback’ policy, by which the company paid Chinese government officials or officials of state-owned entities (such as Chinese ‘design institutes’) in order to secure government contracts for the company.  This policy violates the FCPA, and the Sidely partner responsible for the due diligence has subsequently admitted that this document was a ‘red flag.’  Undoubtedly, Sidley should have disclosed the kickback policy and the document to Watts.  Nonetheless, despite obviously discovering this written policy in its legal due diligence, Sidley never disclosed its existence to Watts in any of Sidley’s legal due diligence reports or in any other communication.  As a result of Sidley’s failure, Watts was unaware of the kickback policy.  Watts paid millions of dollars to purchase the target company, and Watts operated it for several years.  The undisclosed FCPA violations ultimately required an expensive internal investigation and audit by outside attorneys.  After Watts self-reported the violations to the SEC and DOJ, both agencies initiated investigations.  Watts paid millions of dollars in disgorged profits, fines and other penalties to the SEC, millions of dollars in attorneys’ fees and related costs, and Watts was also forced to sell the company for a substantial loss.  Sidley is liable to Watts for these injuries and damages.”

Based on the above allegations, Watts alleges professional negligence, breach of contract, and negligent misrepresentation.

Certain of the allegations in the complaint would seem to be corroborated by an October 2011 SEC FCPA enforcement action against Watts – see here for the prior post.  In that action, Watts agreed to an administrative cease and desist order requiring it to  pay approximately $3.8 million ($2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty).

The allegations in the Watts complaint against Sidley also cast the SEC action in a different light.  Surely, FCPA counsel for Watts shared the substance of the allegations in its complaint with the SEC and DOJ and query whether this is what caused the DOJ to decline prosecution and for the SEC to resolve the matter via an administrative cease and desist order finding violations only of the FCPA’s books and records and internal control provisions.