Ch. 15 Liquidator Renews Push For Paul Weiss Docs

By Andrew Scurria

Law360, New York (February 20, 2015, 4:24 PM ET) — The liquidator probing an alleged $355 million insider fraud at a defunct Chinese medical technology company slammed a decision letting Paul Weiss Rifkind Wharton & Garrison LLP and AlixPartners LLP invoke attorney-client privilege to hold back the results of an internal investigation they conducted for its audit committee.

Kenneth Krys, the man tasked with digging up money for creditors of China Medical Technologies Inc., argued that allowing the law firm and turnaround shop to retain the documents would have the “perverse outcome” of protecting the very corporate malfeasance they were hired to uncover.

“Such an outcome can only serve the interests of the perpetrators of such activities, turning the audit committee into a convenient black box to cover up rather than illuminate corporate wrongdoing,” Krys said in an appellate brief.

Krys is challenging a bankruptcy-court ruling that shielded the documents as privileged work-product. The dispute speaks to the shadowy collapse of CMED, which 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, CMED 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.

Krys, who represents CMED in its Chapter 15 bankruptcy in New York, is contending 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.

Rather, the brief argued, any privileges associated with the records “devolved” to CMED’s liquidators because the audit committee had no independent legal status distinct from the company.

U.S. Bankruptcy Judge Robert Gerber quashed the subpoenas in December, saying that to rule otherwise would discourage company employees from speaking candidly with “the audit committees of the world.”

“Audit committees can’t have others at the company looking over their shoulders, and need to be able to consult with independent counsel, with confidentiality, if they are to do their jobs without interference,” Judge Gerber wrote in the opinion, which was originally filed entirely under seal.

That decision, according to Krys, misconstrued the audit committee as having a separate legal personality separate from CMED itself. Krys is also contending that 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.

CMED won Chapter 15 recognition of its Cayman Islands insolvency proceeding in October 2012, allowing it to enforce orders from its home court in the U.S.

“Any privileges attaching to the subpoenaed documents are now properly asserted or waived by the liquidators,” the brief said.

Representatives for the parties did not immediately respond to a request 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.

–Editing by Chris Yates.