Paul Weiss Fights Med. Co. Liquidator’s Bid For Docs

Law360, New York (April 30, 2015, 6:11 PM ET) — Paul Weiss Rifkind Wharton & Garrison LLP on Thursday told a New York federal judge that the liquidator probing an alleged $355 million fraud at China Medical Technologies Inc. incorrectly cited SEC v. Carrillo Huettel LLP in an attempt to obtain privileged documents concerning the firm’s representation of the company’s audit committee.

The firm slammed liquidator Kenneth Krys’ citation of an April 8 magistrate order in the Carrillo Huettel suit, which deals with whether privilege can be asserted on behalf of a defunct corporation. Paul Weiss said that is not the issue in this instance, because the case relates to the privilege of an audit committee while a corporation itself is in liquidation.

Krys has been tasked with digging up money for creditors of China Medical, and served Paul Weiss and turnaround consultant AlixPartners LLP with subpoenas for the results of the internal investigation they oversaw for the corporation’s audit committee. The liquidator argued in an April 23 notice that in Carrillo Huettel, a magistrate judge ruled that a dissolved or defunct corporation can’t assert attorney-client privilege and it can’t be asserted on the corporation’s account.

“That is a different issue from whether the privilege of an artificial entity like a corporation endures after the corporation itself is defunct. This case also deals with the issue of protection for the work-product of counsel representing an audit committee. [The] opinion does not address that issue, either,” Paul Weiss said in its response.

Paul Weiss and AlixPartners turned over a bevy of data from China Medical, but wouldn’t divulge any attorney-client communications or attorney work product.

In December, U.S. Bankruptcy Judge Robert Gerber quashed the outstanding subpoenas, prompting Krys to file an appeal. Paul Weiss and the consultant argued the judge’s ruling correctly states that the audit committee enjoyed separate privileges apart from the company, and those privileges did not devolve to the liquidator.

“Indeed, audit committees of U.S. issuers, like China Medical, are required to be independent and to have authority to engage their own counsel — a requirement that would be undermined if such committees did not enjoy privileges separate and apart from the companies whose operations they oversee,” the firms said in a March opposition brief.

China Medical went dark in early 2012 and left investors unpaid on $426 million worth of bond debt because of a suspected plot by former chairman and CEO Wu Xiaodong to plunder the company’s worth.

Based in the Cayman Islands, China Medical manufactured and marketed medical technology in China by raising $677 million through bond issuances and a 2005 initial public offering. Paul Weiss was retained by an audit committee of board members in response to an anonymous letter alleging “possible illegal and fraudulent activities” within management.

Representing China Medical in its Chapter 15 bankruptcy in New York, Krys argues that the firms can’t hide behind a privilege claim for the now-defunct audit committee to withhold information that he needs to claw back wrongfully transferred funds.

Allowing the law firm and turnaround shop to retain the documents, Krys claims, would have the “perverse outcome” of protecting the very corporate malfeasance they were hired to uncover. Krys also argues Judge Gerber wrongfully applied U.S. law instead of Cayman Islands law, which purportedly draws no distinction between companies and their audit committees with respect to privilege assertions.

In the April 23 notice of supplemental citation, Krys said the Carrillo Huettel order “is further support” for his argument that “because the audit committee no longer exists, if it did have privileges that do not devolve to the liquidators, then such privileges are now extinguished.”’

Counsel for Krys declined to comment Thursday, while Paul Weiss didn’t immediately respond to requests for comment.

Krys is represented by Eric L. Lewis and Jack B. Gordon of Lewis Baach PLLC and Tracy L. Klestadt, John E. Jureller Jr. and Lauren C. Kiss of Klestadt & Winters.

Paul Weiss is represented by its own Robert A. Atkins, Stephen J. Shimshak and Robert Neil Kravitz.

The case is In Re: China Medical Technologies Inc., case number 1:15-cv-00167, in the U.S. District Court for the Southern District of New York.

–Additional reporting by Stewart Bishop and Andrew Scurria. Editing by Kelly Duncan.