June 14, 2012 / 9:40 PM / 8 years ago

Watts Water sues law firm over FCPA inquiry

* Watts sues law firm Sidley Austin

* Says firm failed to flag risks in acquisition

* Watts paid $3.7 million to resolve bribery case

By Aruna Viswanatha and Nate Raymond

WASHINGTON, June 14 (Reuters) - Watts Water Technologies Inc, a public company that settled a U.S. foreign bribery case last year, sued its law firm and said the sanctions were a direct result of the firm’s legal mistakes.

The lawsuit, filed on June 6 and provided to Reuters on Thursday, is one of the first malpractice lawsuits involving one of the hottest areas for government enforcement, the Foreign Corrupt Practices Act.

Lawyers at Sidley Austin vetted a Chinese acquisition for Watts in 2005, but failed to inform the company about potential corruption issues even though their review had uncovered a suspicious document, according to the lawsuit.

Last October Watts agreed to pay $3.7 million in sanctions to resolve allegations from the Securities and Exchange Commission that sales staff from that acquisition paid bribes to government officials in China to influence how they awarded certain contracts, in violation of the FCPA.

The 1970s era law, which bars bribes to officials of foreign governments, has ensnared some of the largest U.S. companies, from Wal-Mart to Avon Products, forcing them to conduct investigations with legal tabs that run into the hundreds of millions of dollars.

The Chamber of Commerce and other business groups have led a campaign to amend the law and scale back its enforcement, arguing a lack of clarity in the law has had a chilling effect on business.

The new lawsuit could add fuel to their campaign, since it involves a scenario wherein a company was forced to pay millions to settle a case involving conduct that even a top-tier law firm did not detect.

Under the law, companies are responsible not just for the conduct of their own overseas employees, but also potentially liable for the conduct of companies they later acquire.

When the SEC charged General Electric in 2010, for example, over allegations that two companies it acquired paid kickbacks under the U.N. oil-for-food program in Iraq, the head of the agency’s FCPA unit said: “corporate acquisitions do not provide GE immunity from FCPA enforcement.”

“It’s a key area of exposure and concern. That’s why companies do hire competent FCPA counsel to supplement what transactional M&A lawyers are doing,” said Michael Koehler, a professor at Butler University who studies the anti-bribery law.

The Massachusetts-based Watts, which makes water valves and has around $1 billion in annual sales, is seeking through its lawsuit damages of at least $100,000 and legal fees.

A lawyer for Watts declined to comment. A spokeswoman for Sidley did not immediately respond to a request for comment.

WRITTEN “KICKBACK” POLICY

In 2004 Watts considered buying a Chinese company called Changsha Valve Works in order to bid on contracts in the Chinese infrastructure market and told Sidley to vet the legal risks of the acquisition, according to the lawsuit, filed in state court in Washington.

In the course of the due diligence, for which Sidley billed the company $200,000, Sidley uncovered a document that detailed the company’s written policy of paying kickbacks to Chinese government officials in order to secure government contracts, the lawsuit said.

Sidley did not flag that document for Watts, it said.

Watts agreed to buy the company for $9 million in late 2005, but said it wouldn’t have moved forward on the deal if it had known about the kickback policy.

In 2009 potential FCPA violations based on the kickback policy came the attention of Watts’ management, and Watts hired another law firm, Paul Hastings, to conduct an investigation.

Sidley turned over its original due diligence files to that investigation, and in them was that kickback policy, the complaint said.

Paul Hastings also interviewed the Sidley lawyer, Zhengyu Tang, who admitted the policy was a “red flag” that potentially should have been disclosed, according to the lawsuit.

A spokesman for Paul Hastings declined comment. Tang did not immediately respond to an emailed request for comment.

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