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More From Redflex Probe: Evaluating First Law Firm’s Black Eye

Australian photographic traffic-enforcement provider Redflex Holdings, Ltd. was not the only one to take it on the chin when the findings of a second internal investigation into its shady dealings with a Chicago official were made public a little over a week ago. A prominent Chicago law firm also caught a left hook that drew blood, although perhaps more – or of a different kind – than it might actually deserve.

In August 2010, a whistleblower in the Phoenix office of Redflex’s subsidiary here penned a scathing letter to the parent’s board in Australia alleging that the cheeky relationship between the company and a managing deputy commissioner in the Chicago Department of Transportation was “insider fraud” of such a magnitude that it “would take down the contract and most likely the company.”

At the heart of executive Robert Feiler’s complaint was the more than $2.07 million in cash and gifts – airfare, hotel fees, golf outings, and meals – allegedly given to Deputy Director of Transportation John Bills through consultant Martin O’Malley and personally authorized or paid for by Executive Vice President Aaron Rosenberg.

The Chicago Tribune got wind of this potential scandal and sought comment from Redflex in October 2012. The company dispatched General Counsel Andrejs Bunkse to answer the paper’s questions about its relationship with Bills and O’Malley. The GC admitted that the Feiler allegations shook the company and disclosed that it had retained the highly-respected law firm of Quarles & Brady to undertake a “deep dive” investigation into the matter.

The Quarles report back to Redflex found a single instanced of impropriety – a $910.71 reimbursement to Bills by Rosenberg for a two-day stay at the Arizona Biltmore hotel – that was labeled a “a regrettable lapse and an oversight.” The EVP was sent to “anti-bribery training” and the matter was considered closed.

When Redflex was subsequently disqualified from bidding on Chicago’s newest speed camera initiative and the Bills connection was referred to the City’s Inspector General for further investigation, the company hired another prestigious Chicago law firm — Sidley Austin — to re-examine the allegations. Last month, it presented the results of this second internal probe to the Redflex board.

On March 4, 2013, Redflex detailed the results of the second investigation to the Australian Securities Exchange. In a press release that presumably paraphrased the Sidley report, Quarles & Brady – although not mentioned by name – got pummeled for its earlier work. In pertinent part, the ASE disclosure read as follows:

The 2010 investigation was conducted by a law firm with the assistance of the former CFO, and was overseen primarily by the former General Counsel and secondarily by the Audit Committee. The investigation consisted of interviews of three Redflex officials, no email review, and very limited document review.

The former CFO limited his review of the expenses paid to the City Program Manager to the former EVP’s expense reports for 2009-10. The former CFO did not analyze data from prior years or of other individuals. There was no attempt to interview the Consultant. Some of those interviewed by the law firm did not provide complete and truthful information.

The law firm’s 2010 report stated that all relevant employees had been interviewed and the relevant expense reports had been reviewed thoroughly. The report concluded that the allegations were unfounded except for a March 2010 $910 hotel expense for the City Program Manager, paid for by the former EVP and reimbursed by Redflex. The report did not discuss whether this or other expenses violated the City of Chicago Ethics Ordinance.

The investigation was conducted in a manner that was clearly inadequate to determine whether the allegations were true, and there was inadequate oversight.

While these findings and the resulting conclusion are surely painful for Quarles to hear, one suspects that all of the blame for an inadequate investigation should not be laid entirely at its feet. It seems from experience and from reading between the lines that Redflex ought to be shouldering much of that burden.

Internal investigations – as Wal-Mart can attest – can be very costly adventures, particularly when outside law firms are given marching orders to follow all leads to whatever ends. Law firms are more than happy to be tasked with this responsibility while the meter runs. In the second Redflex investigation, Sidley was given such unfettered marching orders. It does not appear that Quarles was given the same free rein in the first one.

As stated in the quoted text above, the first Redflex probe appears to have been scoped and carefully controlled by the former CFO and GC, both of whom were let go in the wake of the Bills scandal. It is not difficult to imagine them understanding the purpose of an internal investigation to be damage control, as opposed to a search for the truth. This seems borne out by these points from the Sidley report that seem to put the malicious scienter on Redflex executives, not Quarles lawyers:

Some of the October 2012 disclosures to the Chicago Board of Ethics and the Chicago Tribune were inaccurate and misleading. Those involved in both the 2010 investigation and the 2012 disclosures, including the former General Counsel and former CFO, knew or should have known this.

Among other things, it was improper for them to describe the 2010 investigation and the associated expense review as “thorough”, “complete”, or “exhaustive”. In addition, in Redflex’s submission to the Board of Ethics, it was improper for them to include, and refer positively to, a letter from the City Program Manager which falsely claimed that the $910 hotel stay was a billing error.

If that be the case, then Quarles would seem more worthy of blame for being a pawn in Redflex’s gaming of the first internal investigation. Unless the firm was a willing co-conspirator in the deliberate under-scoping of this project, it is probably more worthy of being damned for poor judgment than for incompetence or worse.

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