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The Untold Story of the Paul Weiss Internal Investigation that Didn’t Catch a Massive Stock Fraud

Courtesy of Pam Martens

Scales of JusticeThe legal press has been having a field day with how the U.S. Department of Justice, funded by U.S. taxpayers to conduct its own serious and unbiased investigations, has been outsourcing its investigations to the criminal target and its outside counsel – specifically, the law firm Paul, Weiss, Rifkind, Wharton & Garrison.

The case making the headlines involves Deutsche Bank. But another Paul Weiss internal investigation that has escaped meaningful scrutiny by mainstream media involves China Medical Technologies. The U.S. Department of Justice now describes this company as a massive securities fraud that dates back to the time that Paul Weiss conducted one of its internal investigations and came up empty-handed – or, at least, that’s what China Medical Technologies told the Securities and Exchange Commission in an official filing document.

China Medical Technologies went public in the U.S. in 2005. The sole underwriter was the large global bank, UBS. A secondary share offering was underwritten by Credit Suisse and Morgan Stanley in 2008. The company was organized as a holding company under the laws of the Cayman Islands and depicted itself as “a leading China-based medical device company that develops, manufactures and markets advanced in-vitro diagnostic products.”

In a Securities and Exchange Commission (SEC) filing on July 30, 2009, China Medical informed its regulator that an anonymous letter had been received by its Audit Committee containing “allegations of irregularities and improper conduct” in connection with acquisitions made by the company, its disposal of a business, its revenues, and its relationships with stock analysts. The company then explained the ensuing internal investigation by Paul Weiss as follows:

“The audit committee, consisting of three independent directors, decided to initiate an independent internal investigation into the allegations contained in the anonymous letter. In connection with this independent internal investigation, the audit committee engaged an independent law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP, as well as independent forensic accountants, AlixPartners LLP, to assist the audit committee to carry out this independent internal investigation. The independent law firm and forensic accountants involved their experienced personnel from their U.S. offices to conduct this independent internal investigation and began their investigative work in April 2009 and the investigation lasted for more than three months.

“The investigation covered not only the entire senior management team but also employees from various key departments of all operating subsidiaries of the Company. The senior management and other relevant employees of the Company fully cooperated with the independent law firm and forensic accountants in the course of the investigation. During the process of the investigation, the independent law firm reported from time to time the scope, procedures and progress of the investigation to the audit committee. The independent law firm and forensic accountants have substantially completed their investigative work and have reported to the audit committee that the investigation has not identified evidence to support the allegations made in the anonymous letter.”


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