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U.S. & States of California et al. ex U.S. & States of California et al. ex relrel. . Hendrix v. JM Manufacturing Co. Hendrix v. JM Manufacturing Co.

[UNDER SEAL][UNDER SEAL]

Presentation to Presentation to JM EagleJM Eagle

Howard DanielsHoward DanielsAssistant U.S. AttorneyAssistant U.S. Attorney

Central District of Central District of CaliforniaCalifornia

Confidential Settlement Material Subject to Rule 408 and Letter Agreement

Case 5:06-cv-00055-GW Document 128-7 Filed 02/25/10 of 70

22

Overview of PresentationOverview of PresentationI.I. Four Major Production ChangesFour Major Production Changes

A.A. Inferior CompoundInferior CompoundB.B. Increased Extruder SpeedIncreased Extruder SpeedC.C. Screw & Barrel ReplacementScrew & Barrel ReplacementD.D. Other Changes to Production ProcessesOther Changes to Production Processes

II.II. HDB Testing & Evidence of Consistent FailuresHDB Testing & Evidence of Consistent FailuresA.A. Testimony / StatementsTestimony / StatementsB.B. New Product QualificationNew Product QualificationC.C. Relationship to QB test resultsRelationship to QB test results

III.III. Longitudinal Tensile Strength Testing & Evidence of Consistent FLongitudinal Tensile Strength Testing & Evidence of Consistent FailuresailuresA.A. Testimony / StatementsTestimony / StatementsB.B. Internal Test Results for Lobbying Efforts Internal Test Results for Lobbying Efforts C.C. Claims FilesClaims FilesD.D. New Product Testing New Product Testing

IV.IV. Bonus System & Management StructureBonus System & Management Structure

V.V. DamagesDamages


33

JMJM’’ss Approach to Production and Approach to Production and TestingTesting

1990s - now, JM:Materially alters and degrades its manufacturing processesits manufacturing processesFails to reFails to re--qualify pipe qualify pipe Instead, claims initial qualification testing from the early dayInstead, claims initial qualification testing from the early days of JM as s of JM as adequateadequate

Former Corporate QC SupervisorFormer Corporate QC Supervisor:: Barry Lin and Barry Lin and KaushalKaushal RaoRao told told QA personnel to ignore all failing test results because JM had QA personnel to ignore all failing test results because JM had originally obtained UL qualification for its pipe.originally obtained UL qualification for its pipe.

When testing is necessary, cherryWhen testing is necessary, cherry--pick samples and temporarily change pick samples and temporarily change manufacturing processes or falsify test resultsmanufacturing processes or falsify test results

Former Head of R&DFormer Head of R&D:: JM cherryJM cherry--picked samples to present to picked samples to present to regulatory agencies.regulatory agencies.Former Q.C. SupervisorFormer Q.C. Supervisor:: When UL and NSF inspectors came to When UL and NSF inspectors came to the plant, they were presented with falsified test records and wthe plant, they were presented with falsified test records and with ith pipe that was cherrypipe that was cherry--picked for testing.picked for testing. The extruders were slowed The extruders were slowed down while the inspectors were present.down while the inspectors were present.Former Corporate QC Supervisor: Former Corporate QC Supervisor: KaushalKaushal RaoRao and Barry Lin told and Barry Lin told witness to falsify his analysis of claims by customers so as to witness to falsify his analysis of claims by customers so as to make it make it look as though JM was not at fault. Lin and look as though JM was not at fault. Lin and RaoRao would then sign off would then sign off on his reports, aware that they were falsified.on his reports, aware that they were falsified.


44

False Representations:False Representations:Modes of Representing Compliance with Modes of Representing Compliance with

StandardsStandards

Catalogs/websiteCatalogs/website

WarrantiesWarranties

StencilingStenciling

Certifications for ordersCertifications for orders

Letter certificationsLetter certifications

Letters of assuranceLetters of assurance


55

Post TakePost Take--Over, JM Institutes 4 Major Over, JM Institutes 4 Major Changes to ProductionChanges to Production

1.1. Switch to cheaper and inferior compound Switch to cheaper and inferior compound ingredientsingredients

2.2. Increase production rates/quotas and extruder Increase production rates/quotas and extruder speedsspeeds

3.3. Failure to maintain and replace screw & barrel Failure to maintain and replace screw & barrel unitsunits

4.4. Other changes to production and QC Other changes to production and QC processesprocesses


66

1. Changes to Compound Ingredients1. Changes to Compound Ingredients

Switched to cheaper ingredients to increase profitsSwitched to cheaper ingredients to increase profitsWax lubricantsWax lubricantsStabilizersStabilizersResinResin

Changes degraded tensile strengthChanges degraded tensile strengthChanges in quality of compound caused regular test failures (FoChanges in quality of compound caused regular test failures (Former Q.C. rmer Q.C. Supervisor)Supervisor)Switch to Switch to LuxcoLuxco ingredients causes pipes to fail 7,000 ingredients causes pipes to fail 7,000 psipsi LTS requirement LTS requirement (Former QC Supervisor)(Former QC Supervisor)Switch to lower viscosity resin reduced tensile strength (FormerSwitch to lower viscosity resin reduced tensile strength (Former Head of R&D)Head of R&D)Switch from paraffin wax to multiSwitch from paraffin wax to multi--wax caused serious quality problems (Former wax caused serious quality problems (Former Head of R&D)Head of R&D)

All changes directed by management and done to increase profitsAll changes directed by management and done to increase profits


77

Testimony re: Changes to Compound IngredientsTestimony re: Changes to Compound Ingredients

Former manager of 3 plantsFormer manager of 3 plants: : JM management began using cheaper compound ingredients, includinJM management began using cheaper compound ingredients, including wax g wax lubricants, stabilizers and resin.lubricants, stabilizers and resin.

Former Corporate QC ManagerFormer Corporate QC Manager::Management ordered the use of compound ingredients from Management ordered the use of compound ingredients from LuxcoLuxco. These . These ingredients were inferior, and shortly after the changeover to ingredients were inferior, and shortly after the changeover to LuxcoLuxco the pipe the pipe could no longer meet the UL 1285 requirement of 7000 could no longer meet the UL 1285 requirement of 7000 psipsi.. Management Management refused to allow him to pursue the refused to allow him to pursue the LuxcoLuxco quality issue.quality issue.

Former plant QC SupervisorFormer plant QC Supervisor::Changes in the quality of the compound Changes in the quality of the compound caused test failures on a regular caused test failures on a regular basisbasis.. The compound ingredients were changed because management did The compound ingredients were changed because management did everything everything ““on the cheap.on the cheap.””

Former Head of R&D:Former Head of R&D:To reduce material costs, JM switched from paraffin wax to multiTo reduce material costs, JM switched from paraffin wax to multi--wax. The wax. The multimulti--wax had extreme variations and inconsistencies. Eventually the wax had extreme variations and inconsistencies. Eventually the company company had to switch back because of the serious quality problems.had to switch back because of the serious quality problems.

JM switched to a lower viscosity resin. Barry Lin made this decJM switched to a lower viscosity resin. Barry Lin made this decision to save ision to save money. Witness strongly opposed the changemoney. Witness strongly opposed the change--over because the reduced over because the reduced viscosity reduced tensile strength.viscosity reduced tensile strength.


88

Inherent Viscosity of Resin Inherent Viscosity of Resin Reduced in 2002Reduced in 2002

Source: Witness Document


99

2. 2. Increased Production Rates & Quotas Increased Production Rates & Quotas Increased Extruder SpeedIncreased Extruder Speed

Management regularly increases plantsManagement regularly increases plants’’ production production quotas to maximize profitquotas to maximize profit

Increased production quotas Increased production quotas accelerated accelerated extruder speedextruder speed

Extruders run at speeds exceeding rated capacityExtruders run at speeds exceeding rated capacity

Accelerated extruder speed Accelerated extruder speed nonnon--conforming pipeconforming pipe


10101010

Testimony re: Increased Production Testimony re: Increased Production Rates/Quotas Increased Extruder SpeedRates/Quotas Increased Extruder Speed

Former Head of R&DFormer Head of R&D::Barry Lin and Walter Wang repeatedly increased production quotaBarry Lin and Walter Wang repeatedly increased production quotas to s to maximize profits. The increase forced plant managers to speed umaximize profits. The increase forced plant managers to speed up the p the extruders.extruders.

Former Corporate QC SupervisorFormer Corporate QC Supervisor::Management constantly increased production quotas. That caused tManagement constantly increased production quotas. That caused the plants he plants to ramp up the speed at which the extruders were run.to ramp up the speed at which the extruders were run.

Former Q.C. Supervisor Former Q.C. Supervisor ::The extruders were always run at faster than rated capacity, resThe extruders were always run at faster than rated capacity, resulting in nonulting in non--conforming pipe, including nonconforming pipe, including non--conforming tensile strength.conforming tensile strength.

Over time, production goals were increased significantly. This Over time, production goals were increased significantly. This caused the caused the plant managers to increase the speed of the extruders. That madplant managers to increase the speed of the extruders. That made it more e it more difficult to keep the pipe within specification.difficult to keep the pipe within specification.


1111

Screw & Barrel UnitsScrew & Barrel Units

““The Extruder is the first and most The Extruder is the first and most important part of the pipe production important part of the pipe production line.line.””

““The Barrel and Screws Are the Basic and The Barrel and Screws Are the Basic and Most Important Part of an ExtruderMost Important Part of an Extruder””

Source: JMM145413, JMM145422


12121212

3.3. Failure to Maintain and Replace Failure to Maintain and Replace Screw & Barrel UnitsScrew & Barrel Units

Increased extruder speeds screw & barrel Increased extruder speeds screw & barrel units wear out fasterunits wear out faster

Maintenance & replacement schedule not increased to Maintenance & replacement schedule not increased to account for wear & tearaccount for wear & tear

Amortization schedules dictate replacementAmortization schedules dictate replacement

Use of worn screw & barrel units nonUse of worn screw & barrel units non--conforming pipeconforming pipe


13131313

Testimony re: Failure to Maintain and Replace Screw & Testimony re: Failure to Maintain and Replace Screw & BarrelBarrel

Former Manager of Three PlantsFormer Manager of Three Plants::The increased speed of the extruders meant that the screw & barrThe increased speed of the extruders meant that the screw & barrel el units wore out faster, but units wore out faster, but maintenance and replacement schedules maintenance and replacement schedules were not modified to take increased wear and tear into accountwere not modified to take increased wear and tear into account..

Former Corporate QA Supervisor at HQFormer Corporate QA Supervisor at HQ::JMJM’’ss screw and barrel units were constantly wearing out because of screw and barrel units were constantly wearing out because of the high extruder speeds, and the high extruder speeds, and JM did not replace them often enough. JM did not replace them often enough. This contributed significantly to producing nonThis contributed significantly to producing non--conforming pipe.conforming pipe.

Former plant QC supervisorFormer plant QC supervisor::JM far exceeded the screw and barrel life expectancy, and JM far exceeded the screw and barrel life expectancy, and management would not allow replacement often enough.management would not allow replacement often enough.

Former employee in R&D Department/engineerFormer employee in R&D Department/engineer::The screw and barrel units were replaced according to an The screw and barrel units were replaced according to an amortization schedule. This led to the use of worn screw and baamortization schedule. This led to the use of worn screw and barrel rrel units. In fact, JM far exceeded the life expectancy of the unitunits. In fact, JM far exceeded the life expectancy of the units. s. Management overruled plant managers who tried to replace the uniManagement overruled plant managers who tried to replace the units.ts.


1414

4. Other Changes to Production and 4. Other Changes to Production and QC ProcessQC Process

Operators poorly trainedOperators poorly trainedLine operators used false readingsLine operators used false readings

Insufficient QC personnelInsufficient QC personnel

Insufficient personnel on production floorInsufficient personnel on production floorWharton Wharton –– one employee for four linesone employee for four linesLittle or no testing on swing/night shifts at some plantsLittle or no testing on swing/night shifts at some plants

Intimidation of QC personnelIntimidation of QC personnel

Test equipment broken or improperly maintainedTest equipment broken or improperly maintained


1515

Insufficient PersonnelInsufficient Personnel

““Several plants also reported that they have too little Several plants also reported that they have too little time to completely inspect even one pipe per unit.time to completely inspect even one pipe per unit.””

““At David ChenAt David Chen’’s request, Jack Hwang asked the plant s request, Jack Hwang asked the plant QA representatives how many pipe [sic] they inspect QA representatives how many pipe [sic] they inspect in each unit in the 24in each unit in the 24--hour drop area. Several replied hour drop area. Several replied that with current production levels, staff levels, and that with current production levels, staff levels, and assigned duties, they cannot inspect even one pipe in assigned duties, they cannot inspect even one pipe in each unit.each unit.””



1616

Missing/Broken EquipmentMissing/Broken Equipment

Batchelor, Wilton, Pueblo & Butler do not have Batchelor, Wilton, Pueblo & Butler do not have modern machines for stiffness testmodern machines for stiffness testQuick Burst TestingQuick Burst Testing

Only Pueblo has test temperature control for quick Only Pueblo has test temperature control for quick burst testingburst testingFour plants conducted testing improperlyFour plants conducted testing improperly

Hydrostatic proof test Hydrostatic proof test –– some plants cansome plants can’’t maintain t maintain stable test pressurestable test pressureSustained pressure test equipment not functioning Sustained pressure test equipment not functioning at some plantsat some plants



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Guide to PSI CalculationsGuide to PSI Calculations

Hydrostatic Design Basis (HDB): 4,000 Hydrostatic Design Basis (HDB): 4,000 psipsi

Quick Burst (QB): 6,400 Quick Burst (QB): 6,400 psipsi

JM requirement = 7,200 JM requirement = 7,200 psipsi

Longitudinal Tensile Strength (LTS): 7,000 Longitudinal Tensile Strength (LTS): 7,000 psipsi


18181818

HDB TestingHDB Testing

A qualification testA qualification test

Gold standard provides best indication Gold standard provides best indication of longof long--term tensile strengthterm tensile strength

Source: Witness Document (Email from Source: Witness Document (Email from FasslerFassler to Jack Hwang, 11/13/03, re: to Jack Hwang, 11/13/03, re: ““Qualifying pushQualifying push--on CIOD joints under ASTM D3139 section 5.2on CIOD joints under ASTM D3139 section 5.2””))


1919

Three Ways We Know JM Three Ways We Know JM Consistently Fails HDBConsistently Fails HDB

1.1. Testimony/Documents re: HDB testing Testimony/Documents re: HDB testing of oneof one--inch IPS pipeinch IPS pipe

2.2. New product qualification (NoNew product qualification (No--ThickenedThickened--Section pipe)Section pipe)

3.3. QB resultsQB results


2020

1.1. Testimony re: HDB Testing on Testimony re: HDB Testing on OneOne--Inch IPS PipeInch IPS Pipe

Former Head of R&DFormer Head of R&D: Beginning around 1997, : Beginning around 1997, JM began to experience regular failures on JM began to experience regular failures on HDB and hoop stress testing. The witness HDB and hoop stress testing. The witness viewed this as a serious problem for the quality viewed this as a serious problem for the quality of the pipe. However, management refused to of the pipe. However, management refused to give him the authority to look for the root give him the authority to look for the root cause(scause(s) of the failures. In all probability the ) of the failures. In all probability the causes were the extruder speed and the use of causes were the extruder speed and the use of cheaper materials.cheaper materials.


2121

In January 2000, JM had Rohm & Haas (In January 2000, JM had Rohm & Haas (““R&HR&H””) perform HDB ) perform HDB testing on two sets of samples of its onetesting on two sets of samples of its one--inch IPS pipe from the inch IPS pipe from the McNaryMcNary plant:plant:


2222

Email from Email from FasslerFassler to Maria to Maria BoitzBoitz(Corporate QC Supervisor):(Corporate QC Supervisor):


2323

2. HDB Failures During Trial Runs of 2. HDB Failures During Trial Runs of NoNo--Thickened PipeThickened Pipe

Testimony: Testimony: Former Head of R&DFormer Head of R&D: For the : For the ““NoNo--ThickenedThickened--SectionSection”” project, the pipe failed testing 14 times in a project, the pipe failed testing 14 times in a row and only passed on the 15row and only passed on the 15thth try because of luck try because of luck of the draw.of the draw.

Documented Test Results:Documented Test Results:By August 2004, 6 of 7 samplings had failed HDBBy August 2004, 6 of 7 samplings had failed HDBAt least 2 more HDB failures between Dec. 2004 At least 2 more HDB failures between Dec. 2004 and Dec. 2005and Dec. 2005

Source: JMM114028, JMM121953, Witness Documents, JMM121916


2424


2525


2626

How JM Obtained UL Qualification for How JM Obtained UL Qualification for NoNo--Thickened PipeThickened Pipe

Samples were not produced under normal Samples were not produced under normal manufacturing conditionsmanufacturing conditions

Extruder speed is slowedExtruder speed is slowedTorque increased Torque increased Compound ingredients improvedCompound ingredients improved

Pipe was prePipe was pre--screened to ensure QB results are above screened to ensure QB results are above 7,200 7,200 psipsi to improve likelihood of passing HDBto improve likelihood of passing HDB

Pipe used for UL testing comes from same lot of pipe shown to Pipe used for UL testing comes from same lot of pipe shown to have QB results > 7,200 have QB results > 7,200 psipsi

FasslerFassler email, 6/29/06email, 6/29/06:: ““Have the plants conduct their routine startHave the plants conduct their routine start--up up QB tests to specimen failure. Hopefully, they can meet or exceeQB tests to specimen failure. Hopefully, they can meet or exceed the d the 7,200 7,200 psipsi hoop stress benchmark. Pipe lots with less than 7,200 hoop stress benchmark. Pipe lots with less than 7,200 psipsihoop stress at failure have a markedly higher rate of HDB failurhoop stress at failure have a markedly higher rate of HDB failures. In es. In recent years the HDB test success rate is below 50%.recent years the HDB test success rate is below 50%.””



2727

FasslerFassler’’ss IRA Approving Production of IRA Approving Production of NoNo--ThickenedThickened--Section Pipe, 4/29/05:Section Pipe, 4/29/05:

Handwritten notation in Barry Lin’s signature block: “In consideration of several test failures for No-Thick Section Project we propose to have PWI & PFO to produce non-thick-section product first. After both plant successfully produce C-900 productthen we will apply to all plants. 5/10/05”

Handwritten notation in Walter Wang’s signature block: “Agree to eliminate thickenedsection for C-900 Blue Brute (4” – 12”) DR18 only; since this product line passed allagency requirements. Agree effective for all plants starting 6-01-05.”


2828

Since receiving UL listing in 2005 and Since receiving UL listing in 2005 and 2006, No2006, No--ThickenedThickened--Section pipe is Section pipe is

all that JM currently producesall that JM currently produces


2929

3. QB Results as Predictor of 3. QB Results as Predictor of Likelihood of Failing HDBLikelihood of Failing HDB

JM Internal Research concludes 7,200 JM Internal Research concludes 7,200 psipsi on QB is on QB is required to meet the HDB qualification category of required to meet the HDB qualification category of 4,000 4,000 psipsi..

QB results less than 7,200 QB results less than 7,200 psipsi = suspect/questionable pipe= suspect/questionable pipe

QB results less than 7,000 QB results less than 7,000 psipsi = bad pipe= bad pipeSource: Witness Document, Source: Witness Document, JMM130479

AWWA Standard minimum requirement for QB AWWA Standard minimum requirement for QB is 6,400 is 6,400 psipsi..


3030

Comparison of QB Testing and HDB Data SetsComparison of QB Testing and HDB Data Sets

QB time

715663266196

364136453683

HDB time

Minimum to pass: 3,830 psi


3131

Email from Will Email from Will FasslerFassler to Jack Hwang to Jack Hwang (12/11/01):(12/11/01):


3232

Memo from Memo from FasslerFassler totoJack Hwang, [1/25/02], re:Jack Hwang, [1/25/02], re:““Benefits of QuickBenefits of Quick--BurstBurstTesting to 7,200 Testing to 7,200 psipsi Hoop Hoop StressStress””



3333

JM Is WellJM Is Well--Aware of Relationship Aware of Relationship Between QB and HDBBetween QB and HDB

JohnsJohns--Manville policy to scrap pipe with QB < 7,200 Manville policy to scrap pipe with QB < 7,200 psipsi

JM draws connection from its own test resultsJM draws connection from its own test resultsQB & HDB testing of 1QB & HDB testing of 1--inch IPS pipe in May 2000inch IPS pipe in May 2000

R&D DataR&D Data

JM uses QB results to cherryJM uses QB results to cherry--pick pipe for HDB pick pipe for HDB testing by third partiestesting by third parties

NoNo--ThickenedThickened--Section ProjectSection Project

Audits by Outside AgenciesAudits by Outside Agencies


3434

JM Test Data Showing CorrelationJM Test Data Showing CorrelationQB & HDB testing of 1QB & HDB testing of 1--inch IPS pipe in May 2000:inch IPS pipe in May 2000:

Email from Will Email from Will FasslerFassler to Maria to Maria BoitzBoitz, 5/12/00, 5/12/00


3535Source: Witness Document


3636

R&D Data:R&D Data:

Memo from Will Memo from Will FasslerFassler to David Chen (Plant Manager, to David Chen (Plant Manager, Stockton), 4/17/02Stockton), 4/17/02



3737

CherryCherry--Picking for HDB Testing:Picking for HDB Testing:NoNo--ThickenedThickened--Section Project: Qualification AttemptsSection Project: Qualification Attempts

Email from Will Email from Will FasslerFassler, 6/23/06, 6/23/06



3838

Outside AgenciesOutside AgenciesWill Will FasslerFassler’’ss PowerPoint Presentation on HDB at PowerPoint Presentation on HDB at 11/11/04 Quality Assurance Meeting11/11/04 Quality Assurance Meeting



3939

FasslerFassler’’ss Last StandLast Stand

On November 11, 2004, one week On November 11, 2004, one week before the decision is made to reduce before the decision is made to reduce the QB requirement from 7,200 the QB requirement from 7,200 psipsi to to 6,400 6,400 psipsi, , FasslerFassler does a presentation does a presentation on HDB that highlights the connection on HDB that highlights the connection between QB results below 7,200 between QB results below 7,200 psipsiand HDB failures.and HDB failures.

FasslerFassler instructs his audience only to instructs his audience only to send R&D and outside agencies pipe send R&D and outside agencies pipe samples prepared from pipe with a samples prepared from pipe with a QB result of 7,200 or higher.QB result of 7,200 or higher.



4040

Lin Orders Yang to Have QB Lin Orders Yang to Have QB Requirement LoweredRequirement Lowered

Email from Barry Lin to K.C. Yang, 9/3/04: Email from Barry Lin to K.C. Yang, 9/3/04:


4141

Internal Recommendation & Internal Recommendation & Authorization (IRA), dated 11/19/04Authorization (IRA), dated 11/19/04



4242

Timeline of Timeline of JMJM’’ss QB RequirementQB Requirement


4343

JMJM’’ss QB ResultsQB Results Fell Below 7,200 Fell Below 7,200 psipsi

Source: Witness Document; see, e.g., JMM117103, JMM117088


4444

Longitudinal Tensile Strength (LTS)Longitudinal Tensile Strength (LTS)

A qualification testA qualification test

Provides best indication of shortProvides best indication of short--term term tensile strengthtensile strength


4545

Four Ways We Know JM Four Ways We Know JM Consistently Fails LTSConsistently Fails LTS

1.1. TestimonyTestimony

2.2. Internal testing for lobbying efforts to revise Internal testing for lobbying efforts to revise AWWA/ASTM/UL standards to make it AWWA/ASTM/UL standards to make it easier for pipe manufacturers to pass LTSeasier for pipe manufacturers to pass LTS

3.3. Claims TestingClaims Testing

4.4. New product (30New product (30-- and 36and 36--inch pipe) testinginch pipe) testing


4646

Former Corporate QC Supervisor:Former Corporate QC Supervisor:From 1997 through 2005 when he departed, JM From 1997 through 2005 when he departed, JM was unable to manufacture pipe that met the UL was unable to manufacture pipe that met the UL tensile strength requirement. During this period tensile strength requirement. During this period 100% of the pipe was non100% of the pipe was non--conforming for UL conforming for UL 1285.1285.

Former Head of R&D:Former Head of R&D:From 1991 through 2002, between 50From 1991 through 2002, between 50--80% of the 80% of the pipe produced by JM was nonpipe produced by JM was non--conforming. From conforming. From 2002 through 2005, 100% of the pipe was non2002 through 2005, 100% of the pipe was non--conforming.conforming.

1. Testimony re: Percentage of LTS 1. Testimony re: Percentage of LTS FailuresFailures


4747

Testimony re: Cause of LTS FailuresTestimony re: Cause of LTS Failures

Switch to Cheaper Ingredients in Compound:Switch to Cheaper Ingredients in Compound:

Former QC SupervisorFormer QC Supervisor::Changes in the quality of the compound caused test failures on aChanges in the quality of the compound caused test failures on aregular basis. The compound ingredients were regular basis. The compound ingredients were changed because changed because management did everything management did everything ““on the cheap.on the cheap.””

Former Corporate QC SupervisorFormer Corporate QC Supervisor::To increase profits management ordered the use of compound To increase profits management ordered the use of compound ingredients from a company called ingredients from a company called LuxcoLuxco. These ingredients were . These ingredients were inferior, and shortly after the changeover to inferior, and shortly after the changeover to LuxcoLuxco the pipe could no the pipe could no longer meet the UL 1285 requirement of 7,000 longer meet the UL 1285 requirement of 7,000 psipsi. Management . Management refused to allow him to pursue the refused to allow him to pursue the LuxcoLuxco quality issue.quality issue.

Former Head of R&D:Former Head of R&D:In 2000, JM switched to a lower viscosity resin. Barry Lin madeIn 2000, JM switched to a lower viscosity resin. Barry Lin made this this decision to save money. [R&D] strongly opposed the changedecision to save money. [R&D] strongly opposed the change--over over because the reduced viscosity reduced tensile strength.because the reduced viscosity reduced tensile strength.


4848

Testimony re: Cause of LTS Failures Testimony re: Cause of LTS Failures (cont(cont’’d)d)

Increased production rates/extruder speeds:Increased production rates/extruder speeds:Former Head of R&DFormer Head of R&D::

Pipe produced with extruders that run too fast will Pipe produced with extruders that run too fast will often fail tensile strength tests. The nonoften fail tensile strength tests. The non--conforming conforming pipe was shipped anyway. This problem emerged pipe was shipped anyway. This problem emerged around 1997 and continued until witness left in 2007. around 1997 and continued until witness left in 2007.

Former QC SupervisorFormer QC Supervisor::

The extruders were always run at faster than rated The extruders were always run at faster than rated capacity, resulting in noncapacity, resulting in non--conforming pipe, conforming pipe, including nonincluding non--conforming tensile strength.conforming tensile strength.


4949

2. Internal Testing for Lobbying 2. Internal Testing for Lobbying AWWA/ASTM/UL to Ease LTS AWWA/ASTM/UL to Ease LTS

RequirementsRequirementsIn Jan. 2006, JM tested at least one sample of current In Jan. 2006, JM tested at least one sample of current production pipe from all of the plantsproduction pipe from all of the plants

44”” DR 18 pipe: ranged from 6,670 DR 18 pipe: ranged from 6,670 –– 7,060 7,060 psipsi44”” DR 25 pipe: ranged from 6,660 DR 25 pipe: ranged from 6,660 –– 6,680 6,680 psipsiConclusion:Conclusion: ““The apparent longitudinal tensile strength of 4The apparent longitudinal tensile strength of 4”” DR 18 & DR 18 & DR 25 pipe DR 25 pipe at all facilitiesat all facilities is below the desired level of 7,150 is below the desired level of 7,150 psipsi..””

In July 2006, JM tested three runs of 4In July 2006, JM tested three runs of 4”” DR 25 pipe from DR 25 pipe from FontanaFontana

Each of the 3 trial runs failed LTSEach of the 3 trial runs failed LTS11stst trial: 6,610 trial: 6,610 psipsi22ndnd trial: 6,680 trial: 6,680 psipsi33rdrd trial: 6,550 trial: 6,550 psipsi

Source: Witness Document, JMM123744


5050

3. Claims Testing3. Claims Testing

Occasionally, customers test pipe in Occasionally, customers test pipe in conjunction with a claim for nonconjunction with a claim for non--conforming conforming pipepipe

Pipe fails LTS in large percentage of these Pipe fails LTS in large percentage of these claimsclaims

John HendrixJohn Hendrix: During his 3 years at JM, LTS tests : During his 3 years at JM, LTS tests conducted in 14 claims. Of 14 tests, 12 failed LTSconducted in 14 claims. Of 14 tests, 12 failed LTS


5151

Examples of Failing LTS Results from Examples of Failing LTS Results from ClaimsClaims

Claim Name & No. LTS Results Test Date

Q00-H-41Ferguson Cities Supply Brigman Construction

6,600 psi 09/28/00

Q00-H-14Tec Utilities

Sample 2: 6,680 psiSample 3: 6,750 psiSample 4: 6,940 psi

10/31/00

Q02-J-40Westgate Resorts

6,833 psi 10/01/02

Q05-C-08 Sheldon Site Utilities

Sample 1: 6,777 psiSample 2: 6,775 psi

6/9/05

Q05-H-21Nevada –High Desert State Prison

6,349 psi 12/2/05


5252

4. Attempted Qualification of 304. Attempted Qualification of 30--inch inch and 36and 36--inch Pipeinch Pipe

Between 2001 and 2004, JM conducted 11 LTS Between 2001 and 2004, JM conducted 11 LTS tests:tests:

97 samples were tested97 samples were tested

All 97 were below 7,000 All 97 were below 7,000 psipsi

100% failure rate100% failure rate


5353

Source: JMM122179, JMM117882, JMM117886, JMM116146, JMM116148, JMM116109, JMM116110, JMM116106, JMM116107, JMM122050-51, JMM122068-69, JMM122079, JMM122080, JMM122083, JMM122095-96, JMM122100, JMM122178, JMM122181, JMM122154, JMM122158, JMM116265


5454Source: JMM122179 Source: JMM122179

Types of CherryTypes of Cherry--Picking and Process Picking and Process Modifications Used:Modifications Used:

Changes to Extrusion ProcessChanges to Extrusion ProcessIncrease shear/torque on extruder (to work compound more Increase shear/torque on extruder (to work compound more thoroughly)thoroughly)Slow down extruder speeds Slow down extruder speeds Replace used Screw & Barrel with new onesReplace used Screw & Barrel with new ones

Changes to Specimen PreparationChanges to Specimen PreparationChange the directional cut from tangential to radialChange the directional cut from tangential to radialChange the dimensions to equal the thickness of the pipe wallChange the dimensions to equal the thickness of the pipe wall

Changes to CompoundChanges to CompoundUse JM90R compound instead of JM90Use JM90R compound instead of JM90Eliminate use of Eliminate use of LuxcoLuxco brand multibrand multi--waxwaxTry singleTry single--batch compounding (instead of doublebatch compounding (instead of double--batch)batch)


5555

Example of Process Modification JM Example of Process Modification JM Has No Intention of Actually Has No Intention of Actually

ImplementingImplementing

SingleSingle--batch compounding:batch compounding:All the resin goes into the hot mixer with all the additivesAll the resin goes into the hot mixer with all the additives

Contrast with doubleContrast with double--batch compounding batch compounding –– half the resin half the resin goes through the hot mixer with all the additives and goes through the hot mixer with all the additives and remainder gets added in cold mixerremainder gets added in cold mixer

Cost ProhibitiveCost ProhibitiveTo switch to hotTo switch to hot--batching, JM would have to retrofit or batching, JM would have to retrofit or replace mixers on extruders at 12 plantsreplace mixers on extruders at 12 plants


5656

Email from Email from FasslerFassler to Jack Hwang, 5/12/03, re: to Jack Hwang, 5/12/03, re: ““SingleSingle--batch trial [on 36batch trial [on 36--inch pipe]inch pipe]””


5757

After 11 consecutive failures, JM After 11 consecutive failures, JM abandons 30abandons 30-- & 36& 36--inch project and inch project and withdraws qualification file at UL.withdraws qualification file at UL.


5858

Significance of Failure to Obtain UL Significance of Failure to Obtain UL Listing for 30Listing for 30-- and 36and 36--inch Pipeinch Pipe

Although JM never ended up selling UL listed 30Although JM never ended up selling UL listed 30-- and 36and 36--inch pipe, these inch pipe, these failures translate directly to failures translate directly to JMJM’’ss other ULother UL--listed products. listed products.

What the failed pipe and What the failed pipe and JMJM’’ss ULUL--listed pipe sold during this time period listed pipe sold during this time period have in common:have in common:

Both were made using the same JM90 compoundBoth were made using the same JM90 compoundBoth were made at the same plantsBoth were made at the same plantsBoth were made using the same extruders and processesBoth were made using the same extruders and processes

What JM should have done upon seeing this level of failures in pWhat JM should have done upon seeing this level of failures in products roducts made using the same compound, extruders and processes as ULmade using the same compound, extruders and processes as UL--listed pipe:listed pipe:

Remedy known problems with current production Remedy known problems with current production Suspend use of the UL listing/notify UL & customersSuspend use of the UL listing/notify UL & customers


5959

Comparing LTS Results from Comparing LTS Results from JohnsJohns--Manville and JMManville and JM

JohnsJohns--Manville: Manville:

Results of LTS testing done in 1974 for UL qualificationResults of LTS testing done in 1974 for UL qualification

Range from 7,560 Range from 7,560 –– 8,765 8,765 psipsiSource: UL03116, UL03119, UL03122Source: UL03116, UL03119, UL03122

JM:JM:

Results from Claims, Lobbying and 30Results from Claims, Lobbying and 30-- & 36& 36--inch UL inch UL Qualification TestingQualification Testing

Range from 5,976 Range from 5,976 –– 7,060 7,060 psipsiSource: Witness Document, JMM123744, JMM111171, JMM111174, JSource: Witness Document, JMM123744, JMM111171, JMM111174, JMM111177, MM111177, JMM122179, JMM122122 , JMM122129, JMM122068, JMM122079, JMMJMM122179, JMM122122 , JMM122129, JMM122068, JMM122079, JMM122095, 122095, JMM122158, JMM116265, JMM117882, JMM116146, JMM116109, JMM1JMM122158, JMM116265, JMM117882, JMM116146, JMM116109, JMM12205022050


6060

Forces That Underpin the FraudForces That Underpin the Fraud

1.1. Perverse Bonus SystemPerverse Bonus System

2.2. Managerial Structure Where Plant Managerial Structure Where Plant Managers Override QCManagers Override QC


6161

1. Bonus System1. Bonus System

AllAll of plant managersof plant managers’’ income is in the form of bonuses income is in the form of bonuses Plant managers subject to everPlant managers subject to ever--increasing production quotasincreasing production quotas

Incentives to Ship Rejected PipeIncentives to Ship Rejected PipeTargets are set for rejects and scrapTargets are set for rejects and scrapIf targets are exceeded, cost of additional loss of material is If targets are exceeded, cost of additional loss of material is subtracted subtracted from bonuses from bonuses

Incentive to Falsify Testing/Analysis of ClaimsIncentive to Falsify Testing/Analysis of ClaimsFailures determined to be the plantFailures determined to be the plant’’s fault are charged to that plants fault are charged to that plantSubject pipe is tested by the plant that made the pipeSubject pipe is tested by the plant that made the pipe


6262

Testimony re: Bonus SystemTestimony re: Bonus System

Former Head of R&D:Former Head of R&D:

Management used the bonus system to control employees. The bonuManagement used the bonus system to control employees. The bonusssystem put pressure on plant managers to ship more and more pipesystem put pressure on plant managers to ship more and more piperegardless of impact on quality.regardless of impact on quality.

Former Manager of Three Plants: Former Manager of Three Plants:

Employees in the QA departments were compensated in significant Employees in the QA departments were compensated in significant partpartthrough bonuses, which created a conflict of interest because ththrough bonuses, which created a conflict of interest because they had aey had apersonal incentive to overlook pipe that should have been rejectpersonal incentive to overlook pipe that should have been rejected.ed.

On various occasions, witness approved the shipment of nonOn various occasions, witness approved the shipment of non--conformingconformingpipe because of the bonus system. Witnesspipe because of the bonus system. Witness’’s predecessor at one of thes predecessor at one of theplants did this on a regular basis. plants did this on a regular basis.


6363

““R&D raised the issue that HQ should evaluate the R&D raised the issue that HQ should evaluate the claim samples; having the plants evaluate the claim claim samples; having the plants evaluate the claim samples is an inherent conflict of interest. The plant samples is an inherent conflict of interest. The plant managers objected vigorously. managers objected vigorously. KaushalKaushal RaoRao advised advised that not only does HQ lack the staff but also he agrees that not only does HQ lack the staff but also he agrees with the plant managers and trusts them to make the with the plant managers and trusts them to make the right decision. He then ended this conversation and right decision. He then ended this conversation and stated that there will be no change in this matter and stated that there will be no change in this matter and the plants will continue to evaluate their own the plants will continue to evaluate their own complaint samples.complaint samples.””

Conflict of Interest re: ClaimsConflict of Interest re: Claims



6464

Shortage of QC PersonnelShortage of QC Personnel

““The quality supervisors asked if they could The quality supervisors asked if they could have more auditorshave more auditors……Lin advised that the Lin advised that the number of auditors is set by the budget. No number of auditors is set by the budget. No promises of any more quality auditors. Barry promises of any more quality auditors. Barry Lin stated that plant managers have the Lin stated that plant managers have the authority to modify the quality auditorsauthority to modify the quality auditors’’ duties duties as they see fit.as they see fit.””



6565

Date of Date of EntryEntry Text of Entries from StocktonText of Entries from Stockton’’s Quality s Quality

Emergency ReportEmergency Report

AuthorAuthor

8/30/028/30/02 ““Called Barry Lin to report the tags on the Called Barry Lin to report the tags on the ¾”¾” 200200”” x 20x 20”” S/E were pulled and the units were found S/E were pulled and the units were found in the shipping bays. Also told Barry that this was a common prin the shipping bays. Also told Barry that this was a common practice over the past few years.actice over the past few years.He asked if I had told David Chen [Stockton plant manager] & He asked if I had told David Chen [Stockton plant manager] & ArnelArnel SiojoSiojo. I said I have . I said I have issued letters. I told David Chen that I had notified HQ that oissued letters. I told David Chen that I had notified HQ that out of spec pipe is being released ut of spec pipe is being released by tags being pulled. I told him to call Barry. David said he by tags being pulled. I told him to call Barry. David said he had and he was instructed to had and he was instructed to correct the problem.correct the problem.””

Steve Steve JaveteJavete(QC (QC Supervisor Supervisor at at Stockton)Stockton)

12/6/0212/6/02 ““I found a total of five units that were rejected for thin wall iI found a total of five units that were rejected for thin wall in the Shipping Bay. 2n the Shipping Bay. 2”” Sch40 S/E Sch40 S/E purple pipe. The reject tags had been removed and the marking opurple pipe. The reject tags had been removed and the marking on the units were removed n the units were removed with acetone.with acetone. Alberto was seen by Victor Alberto was seen by Victor DemandeDemande putting the units in the Bay. I told David putting the units in the Bay. I told David Chen about this and he asked what the product was and walked awaChen about this and he asked what the product was and walked away from me and went to his y from me and went to his office and sat down without saying anything. I talk with Jim Reoffice and sat down without saying anything. I talk with Jim Reichert about this and he said he ichert about this and he said he would follow up. I retagged the units in the Bay. would follow up. I retagged the units in the Bay. It appears the practice of pulling reject tags is It appears the practice of pulling reject tags is still going on. It also appears this is going on with the Plantstill going on. It also appears this is going on with the Plant Manager [knowledge it is being] Manager [knowledge it is being] done. I have sent David Chen letters telling him this is going done. I have sent David Chen letters telling him this is going on and even called Barry Lin and on and even called Barry Lin and told him. However, it is still happening.told him. However, it is still happening.””

Steve Steve JaveteJavete

2/5/042/5/04 ““On 2On 2--44--04 Steve Adams and myself saw David Chen and Joe Salas going to 04 Steve Adams and myself saw David Chen and Joe Salas going to the reject bay at about the reject bay at about 3:10 p.m. The pipe they went to see was the 63:10 p.m. The pipe they went to see was the 6”” SCH 40 S/E made in 12/03 and was being held SCH 40 S/E made in 12/03 and was being held for large O.D. (+ .005for large O.D. (+ .005”” to .025to .025”” over max). David stood by while Joe measured some pipeover max). David stood by while Joe measured some pipe..We left the parking lot at that time. We left the parking lot at that time. The next morning (2The next morning (2--55--04) I found out from shipping that 04) I found out from shipping that David Chen released 55 unit of 6David Chen released 55 unit of 6”” SCH 40 S/E claiming they could not find any large O.D. SCH 40 S/E claiming they could not find any large O.D. The morning of 2The morning of 2--55--04 after finding out what was done I went to the Shipping Bay an04 after finding out what was done I went to the Shipping Bay and found a d found a large O.D. (+ .013large O.D. (+ .013””) pipe after checking about 5 pipe. Some of the units were stil) pipe after checking about 5 pipe. Some of the units were still marked with l marked with large O.Dlarge O.D.. I told Jim Reichert what I found and said itI told Jim Reichert what I found and said it’’s no use to tell [illegible] when I tell s no use to tell [illegible] when I tell him. Shipping was also made aware that the pipe still has largehim. Shipping was also made aware that the pipe still has large O.D. in the unit to be shipped. O.D. in the unit to be shipped. The releasing of out of spec pipe from the reject and holding baThe releasing of out of spec pipe from the reject and holding bays by David Chen is still a ys by David Chen is still a problem after he told me it would stop. Still no use to notify problem after he told me it would stop. Still no use to notify HQ because Barry did nothing HQ because Barry did nothing the last time I called him.the last time I called him.””

Steve Steve JaveteJavete

Source: JMM123768-123798


6666

JM Corporate CultureJM Corporate CultureFormer Manager of Three PlantsFormer Manager of Three Plants: :

JJ--M management conveyed to witness that it did not care about the M management conveyed to witness that it did not care about the quality of pipe that quality of pipe that was shipped and cared only about profits. Overall, he concludedwas shipped and cared only about profits. Overall, he concluded that Jthat J--M is a M is a ““slickslick””company run in an unscrupulous manner.company run in an unscrupulous manner.

Former Corporate QC SupervisorFormer Corporate QC Supervisor::Witness quit because management would not let him do his job andWitness quit because management would not let him do his job and cared only about cared only about profit, not whether the pipe that was shipped was nonprofit, not whether the pipe that was shipped was non--conforming. Those employees conforming. Those employees who brought issues of pipe quality to managementwho brought issues of pipe quality to management’’s attention were labeled as s attention were labeled as ““troubletrouble--makers.makers.””

Lin and Lin and RaoRao blocked investigation of causes of nonblocked investigation of causes of non--conformity andconformity andinstead withheld test results from company personnel.instead withheld test results from company personnel.

Former QC SupervisorFormer QC Supervisor::Witness complained to three individuals at headquarters about thWitness complained to three individuals at headquarters about the plante plant’’s refusal s refusal to perform all required testing, but he was ignored. Witness wato perform all required testing, but he was ignored. Witness was instructed to falsify s instructed to falsify inspection and test records.inspection and test records.

Former Head of R&DFormer Head of R&D::ManagementManagement’’s general attitude was that pipe is good if a customer does not s general attitude was that pipe is good if a customer does not return it. return it. In WitnessIn Witness’’s experience with management, they lived by the motto s experience with management, they lived by the motto ““there is no shame there is no shame in lying but there is shame in getting caught lying.in lying but there is shame in getting caught lying.””

ManagementManagement’’s approach is that pipe is good if customer doesns approach is that pipe is good if customer doesn’’t return it. t return it.


6767

JM Pipe Poses a Safety HazardJM Pipe Poses a Safety Hazard

Campbell v. JM Campbell v. JM –– plaintiff injured by exploding pipeplaintiff injured by exploding pipe

OO’’BartoBarto v. JM v. JM –– plaintiff injured by exploding pipeplaintiff injured by exploding pipe

Giles v. JM Giles v. JM –– plaintiff injured by exploding pipeplaintiff injured by exploding pipe

Orange County, FL Orange County, FL –– explosive ruptureexplosive rupture

National Waterworks National Waterworks –– catastrophic blow out, catastrophic blow out, scattered piecesscattered pieces

City of Reno Project City of Reno Project –– buried pipe explodedburied pipe exploded

Sheldon Site Utilities Sheldon Site Utilities –– pipe section explodedpipe section exploded


6868

JohnsJohns--Manville Recognition of HazardManville Recognition of Hazard



6969

Damages: Contract Price TrebledDamages: Contract Price Trebled

One Measure of One Measure of ““benefit of the bargainbenefit of the bargain””

Case law supportCase law supportU.S. v Midwest Specialties, Inc. 134 F.3U.S. v Midwest Specialties, Inc. 134 F.3rdrd 373 (6373 (6thth Circuit, Circuit, 1998)1998)U.S. v U.S. v AerodexAerodex, Inc. 469 F.2, Inc. 469 F.2ndnd 1003 (51003 (5thth Circuit, 1972)Circuit, 1972)

U.S. v. BornsteinU.S. v. Bornstein, 423 U.S. 303 supplies overarching , 423 U.S. 303 supplies overarching principlesprinciples


7070

Estimate of Contract Price Method Estimate of Contract Price Method DamagesDamages

Estimated federal sales in subset of drop Estimated federal sales in subset of drop shipments = $ 10.2 millionshipments = $ 10.2 million

Estimate of drop shipments as percentage of all Estimate of drop shipments as percentage of all sales = 40%sales = 40%

Extrapolated single damages = $25.5 millionExtrapolated single damages = $25.5 million

Extrapolated treble damages = $76.5 millionExtrapolated treble damages = $76.5 million


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