WASHINGTON (CN) – A water technology company claims in court that it hired Sidley Austin to do due diligence on a Chinese water company it wanted to buy, and that the law firm discovered – but did not inform it – that the company was paying kickbacks to Chinese government officials to get contracts.
Watts Water Technologies sued Sidley Austin in Superior Court, alleging legal malpractice, negligence and fraud.
Watts claims that the law firm’s failure to deliver the information in had discovered cost it “millions of dollars in disgorged profits, fines and other penalties to the SEC,” millions of dollars in attorneys’ fees and costs, and forced Watts to sell the company for a substantial loss.
Watts claims its water hardware business stretches across the world and racks up more than $1 billion in annual sales. In 2005, it says, it wanted to expand into China and hired Sidley Austin to investigate Changsha Valve, as a potential acquisition.
“During Sidley’s legal due diligence examination, Changsha Valve produced to Sidley a document demonstrating that Changsha Valve had a written policy that provided for its sales associates to pay ‘kickbacks’ to certain Chinese government officials, or officials of state-owned entities, to secure the award of contracts to Changsha Valve,” according to the complaint.
It adds: “Undoubtedly, Sidley should have disclosed the kickback policy and the document to Watts.”
But Watts says, “Despite the fact that Changsha Valve provided Sidley with a copy of the written kickback policy, Sidley never mentioned the kickback policy in any due diligence report, and did not otherwise inform Watts of the existence of this illegal policy.”
The official corruption was disguised as payments to Chinese “design institutes,” which were owned by the state or state officials, according to the complaint.
Watts claims: “Zhengyu Tank, the Sidley partner who was responsible for managing Sidley’s representation and due diligence services for Watts, has subsequently admitted that this written kickback policy constituted a ‘red flag’ regarding the payment of ‘kickbacks’ or ‘rebates’ to Chinese government officials or officials of state-owned entities.”
Watts says it bought the company for $9 million and ran it for several years before it discovered the kickback policy during a 2009 anti-corruption and Foreign Corrupt Practices Act compliance training program.
It says it hired another attorney to investigate the operation, who found the kickback policy document in Sidley’s files.
Watts says it self-reported the violations and paid large penalties, fines and disgorged profits to the federal government, and was forced to sell Changsha at a loss.
Watts wants to Sidley to pay it more than $100,000 in damages, plus costs.
It is represented by Barry Nace with Paulson Nace.