Government case vs JM Eagle

8/14/2019 Government case vs JM Eagle

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U.S. & States of California et al. exU.S. & States of California et al. ex relrel..

Hendrix v. JM Manufacturing Co.Hendrix v. JM Manufacturing Co.[UNDER SEAL][UNDER SEAL]

Presentation toPresentation to

JM EagleJM Eagle

Howard DanielsHoward Daniels

Assistant U.S. AttorneyAssistant U.S. AttorneyCentral District ofCentral District of

CaliforniaCalifornia

Confidential Settlement Material Subject to Rule 408 and Letter Agreement

Case 5:06-cv-00055-GW-PJW Document 128-7 Filed 02/25/10 Page 1 of 70 Page ID#:1401


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

A.A. Inferior CompoundInferior Compound

B.B. Increased Extruder SpeedIncreased Extruder Speed

C.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 Failures

A.A. Testimony / StatementsTestimony / Statements

B.B. New Product QualificationNew Product Qualification

C.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 Failuresailures

A.A. Testimony / StatementsTestimony / Statements

B.B. Internal Test Results for Lobbying EffortsInternal Test Results for Lobbying Efforts

C.C. Claims FilesClaims FilesD.D. New Product TestingNew Product Testing

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

V.V. DamagesDamages



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JMJMssApproach to Production andApproach to Production and

TestingTesting 1990s - now, JM:

Materially alters and degrades its manufacturing processesits manufacturing processes

Fails to reFails to re--qualify pipequalify pipe Instead, claims initial qualification testing from the early dayInstead, claims initial qualification testing from the early days of JM ass of JM as

adequateadequate

Former Corporate QC SupervisorFormer Corporate QC Supervisor:: Barry Lin andBarry Lin and KaushalKaushal RaoRao toldtoldQA personnel to ignore all failing test results because JM hadQA personnel to ignore all failing test results because JM hadoriginally 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 changepick samples and temporarily changemanufacturing 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 topicked samples to present toregulatory agencies.regulatory agencies.

Former Q.C. SupervisorFormer Q.C. Supervisor:: When UL and NSF inspectors came toWhen 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 withithpipe that was cherrypipe that was cherry--picked for testing.picked for testing. The extruders were slowedThe extruders were sloweddown while the inspectors were present.down while the inspectors were present.

Former Corporate QC Supervisor:Former Corporate QC Supervisor: KaushalKaushal RaoRao and Barry Lin toldand Barry Lin toldwitness to falsify his analysis of claims by customers so as towitness to falsify his analysis of claims by customers so as to make itmake itlook as though JM was not at fault. Lin andlook as though JM was not at fault. Lin and RaoRaowould then sign offwould then sign off

on his reports, aware that they were falsified.on his reports, aware that they were falsified.



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False Representations:False Representations:

Modes of Representing Compliance withModes of Representing Compliance with

StandardsStandards

Catalogs/websiteCatalogs/website

WarrantiesWarranties

StencilingStenciling

Certifications for ordersCertifications for orders

Letter certificationsLetter certifications Letters of assuranceLetters of assurance



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Post TakePost Take--Over, JM Institutes 4 MajorOver, JM Institutes 4 Major

Changes to ProductionChanges to Production

1.1. Switch to cheaper and inferior compoundSwitch to cheaper and inferior compoundingredientsingredients

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

speedsspeeds3.3. Failure to maintain and replace screw & barrelFailure to maintain and replace screw & barrel

unitsunits

4.4. Other changes to production and QCOther changes to production and QCprocessesprocesses



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1. Changes to Compound Ingredients1. Changes to Compound Ingredients

Switched to cheaper ingredients to increase profitsSwitched to cheaper ingredients to increase profits Wax lubricantsWax lubricants

StabilizersStabilizers

ResinResin

Changes degraded tensile strengthChanges degraded tensile strength

Changes 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 toSwitch to LuxcoLuxco ingredients causes pipes to fail 7,000ingredients causes pipes to fail 7,000 psipsi LTS requirementLTS 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 (Formerwax 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



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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 waxg waxlubricants, stabilizers and resin.lubricants, stabilizers and resin.

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

Former plant QC SupervisorFormer plant QC Supervisor::Changes in the quality of the compoundChanges in the quality of the compound caused test failures on a regularcaused test failures on a regularbasisbasis.. The compound ingredients were changed because management didThe compound ingredients were changed because management dideverythingeverything 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. Thewax. Themultimulti--wax had extreme variations and inconsistencies. Eventually thewax had extreme variations and inconsistencies. Eventually thecompanycompany 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 saveision to save

money. Witness strongly opposed the changemoney. Witness strongly opposed the change--over because the reducedover because the reducedviscosity reduced tensile strength.viscosity reduced tensile strength.



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Inherent Viscosity of ResinInherent Viscosity of Resin

Reduced in 2002Reduced in 2002

Source: Witness Document



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2.2. Increased Production Rates & QuotasIncreased Production Rates & QuotasIncreased Extruder SpeedIncreased Extruder Speed

Management regularly increases plantsManagement regularly increases plants productionproductionquotas to maximize profitquotas to maximize profit

Increased production quotasIncreased production quotas acceleratedacceleratedextruder speedextruder speed Extruders run at speeds exceeding rated capacityExtruders run at speeds exceeding rated capacity

Accelerated extruder speedAccelerated extruder speed nonnon--conforming pipeconforming pipe



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Testimony re: Increased ProductionTestimony 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 tos to

maximize profits. The increase forced plant managers to speed umaximize profits. The increase forced plant managers to speed up thep theextruders.extruders.

Former Corporate QC SupervisorFormer Corporate QC Supervisor::

Management constantly increased production quotas. That caused tManagement constantly increased production quotas. That caused the plantshe 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. SupervisorFormer 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. ThisOver time, production goals were increased significantly. This caused thecaused theplant managers to increase the speed of the extruders. That madplant managers to increase the speed of the extruders. That made it moree it moredifficult to keep the pipe within specification.difficult to keep the pipe within specification.



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Screw & Barrel UnitsScrew & Barrel Units

The Extruder is the first and mostThe Extruder is the first and mostimportant part of the pipe productionimportant part of the pipe production

line.line.

The Barrel and Screws Are the Basic andThe Barrel and Screws Are the Basic and

Most Important Part of an ExtruderMost Important Part of an Extruder

Source: JMM145413, JMM145422



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3.3. Failure to Maintain and ReplaceFailure to Maintain and ReplaceScrew & Barrel UnitsScrew & Barrel Units

Increased extruder speeds screw & barrelIncreased extruder speeds screw & barrelunits wear out fasterunits wear out faster

Maintenance & replacement schedule not increased toMaintenance & replacement schedule not increased toaccount 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


C 5 06 00055 GW PJW D 128 7 Fil d 02/25/10 P 13 f 70 P ID


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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 & barrelelunits wore out faster, butunits wore out faster, but maintenance and replacement schedulesmaintenance 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::

JMJMss screw and barrel units were constantly wearing out because ofscrew and barrel units were constantly wearing out because ofthe high extruder speeds, andthe high extruder speeds, andJM 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, andJM far exceeded the screw and barrel life expectancy, andmanagement 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 anThe screw and barrel units were replaced according to anamortization schedule. This led to the use of worn screw and baamortization schedule. This led to the use of worn screw and barrelrrelunits. 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.


C 5 06 00055 GW PJW D t 128 7 Fil d 02/25/10 P 14 f 70 P ID


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4. Other Changes to Production and4. Other Changes to Production and

QC ProcessQC Process

Operators poorly trainedOperators poorly trained Line operators used false readingsLine operators used false readings

Insufficient QC personnelInsufficient QC personnel

Insufficient personnel on production floorInsufficient personnel on production floor WhartonWharton one employee for four linesone employee for four lines

Little 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


Case 5:06 cv 00055 GW PJW Document 128 7 Filed 02/25/10 Page 15 of 70 Page ID


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Insufficient PersonnelInsufficient Personnel

Several plants also reported that they have too littleSeveral 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 Chens request, Jack Hwang asked the plants request, Jack Hwang asked the plantQA representatives how many pipe [sic] they inspectQA representatives how many pipe [sic] they inspect

in each unit in the 24in each unit in the 24--hour drop area. Several repliedhour drop area. Several replied

that with current production levels, staff levels, andthat with current production levels, staff levels, and

assigned duties, they cannot inspect even one pipe inassigned duties, they cannot inspect even one pipe in

each unit.each unit.



Case 5:06-cv-00055-GW-PJW Document 128-7 Filed 02/25/10 Page 16 of 70 Page ID


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Missing/Broken EquipmentMissing/Broken Equipment Batchelor, Wilton, Pueblo & Butler do not haveBatchelor, Wilton, Pueblo & Butler do not have

modern machines for stiffness testmodern machines for stiffness test

Quick Burst TestingQuick Burst Testing

Only Pueblo has test temperature control for quickOnly Pueblo has test temperature control for quickburst testingburst testing

Four plants conducted testing improperlyFour plants conducted testing improperly

Hydrostatic proof testHydrostatic proof test some plants cansome plants cant maintaint maintainstable test pressurestable test pressure

Sustained pressure test equipment not functioningSustained pressure test equipment not functioningat some plantsat some plants





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Guide to PSI CalculationsGuide to PSI Calculations

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

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

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

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

Case 5:06 cv 00055 GW PJW Document 128 7 Filed 02/25/10 Page 17 of 70 Page ID#:1417



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HDB TestingHDB Testing

A qualification testA qualification test Gold standard provides best indicationGold standard provides best indication

of longof long--term tensile strengthterm tensile strength

Source: Witness Document (Email fromSource: Witness Document (Email from FasslerFasslerto 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))

Case 5:06 cv 00055 GW PJW Document 128 7 Filed 02/25/10 Page 18 of 70 Page ID#:1418



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Three Ways We Know JMThree Ways We Know JMConsistently Fails HDBConsistently Fails HDB

1.1. Testimony/Documents re: HDB testingTestimony/Documents re: HDB testingof 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

g g#:1419



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1.1. Testimony re: HDB Testing onTestimony re: HDB Testing onOneOne--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 onJM began to experience regular failures on

HDB and hoop stress testing. The witnessHDB and hoop stress testing. The witness

viewed this as a serious problem for the qualityviewed this as a serious problem for the qualityof the pipe. However, management refused toof the pipe. However, management refused to

give him the authority to look for the rootgive him the authority to look for the root

cause(scause(s) of the failures. In all probability the) of the failures. In all probability thecauses were the extruder speed and the use ofcauses were the extruder speed and the use of

cheaper materials.cheaper materials.

#:1420

Case 5:06-cv-00055-GW-PJW Document 128-7 Filed 02/25/10 Page 21 of 70 Page ID# 1421


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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 theinch IPS pipe from the

McNaryMcNaryplant:plant:

#:1421



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Email fromEmail from FasslerFassler to Mariato Maria BoitzBoitz

(Corporate QC Supervisor):(Corporate QC Supervisor):

#:1422



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2. HDB Failures During Trial Runs of2. HDB Failures During Trial Runs ofNoNo--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 aproject, the pipe failed testing 14 times in a

row and only passed on the 15row and only passed on the 15thth

try because of lucktry because of luckof 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 HDB At least 2 more HDB failures between Dec. 2004At least 2 more HDB failures between Dec. 2004

and Dec. 2005and Dec. 2005

Source: JMM114028, JMM121953, Witness Documents, JMM121916

#:1423



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#:1424



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#:1425



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How JM Obtained UL Qualification forHow JM Obtained UL Qualification for

NoNo--Thickened PipeThickened Pipe

Samples were not produced under normalSamples were not produced under normal

manufacturing conditionsmanufacturing conditions Extruder speed is slowedExtruder speed is slowed

Torque increasedTorque increased

Compound ingredients improvedCompound ingredients improved

Pipe was prePipe was pre--screened to ensure QB results are abovescreened to ensure QB results are above7,2007,200 psipsi to improve likelihood of passing HDBto improve likelihood of passing HDB

Pipe used for UL testing comes from same lot of pipe shown toPipe used for UL testing comes from same lot of pipe shown tohave QB results > 7,200have QB results > 7,200 psipsi Fasslerassler email, 6/29/06mail, 6/29/06: Have the plants conduct their routine startHave the plants conduct their routine start--upup

QB tests to specimen failure. Hopefully, they can meet or exceeQB tests to specimen failure. Hopefully, they can meet or exceed thed the7,2007,200 psipsi hoop stress benchmark. Pipe lots with less than 7,200hoop 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. Ines. Inrecent years the HDB test success rate is below 50%.recent years the HDB test success rate is below 50%.




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FasslerFasslerss IRA Approving Production ofIRA Approving Production ofNoNo--ThickenedThickened--Section Pipe, 4/29/05:Section Pipe, 4/29/05:

Handwritten notation in Barry Lins 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 product

then we will apply to all plants. 5/10/05

Handwritten notation in Walter Wangs signature block: Agree to eliminate thickened

section for C-900 Blue Brute (4 12) DR18 only; since this product line passed all

agency requirements. Agree effective for all plants starting 6-01-05.



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Since receiving UL listing in 2005 andSince receiving UL listing in 2005 and

2006, No2006, No--ThickenedThickened--Section pipe isSection pipe isall that JM currently producesall that JM currently produces


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

QB time

715663266196

364136453683

HDB time

Minimumto pass:3,830 psi



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Email from WillEmail from Will FasslerFassler to Jack Hwangto Jack Hwang

(12/11/01):(12/11/01):



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Memo fromMemo from FasslerFassler toto

Jack Hwang, [1/25/02], re:Jack Hwang, [1/25/02], re:

Benefits of QuickBenefits of Quick--BurstBurst

Testing to 7,200Testing to 7,200 psipsi HoopHoop

StressStress



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

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


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R&D Data:R&D Data:



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R&D Data:R&D Data:

Memo from WillMemo from Will FasslerFassler to David Chen (Plant Manager,to David Chen (Plant Manager,

Stockton), 4/17/02Stockton), 4/17/02



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Outside AgenciesOutside Agencies

WillWill FasslerFasslerss PowerPoint Presentation on HDB atPowerPoint Presentation on HDB at11/11/04 Quality Assurance Meeting11/11/04 Quality Assurance Meeting




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FasslerFasslerss Last StandLast Stand

On November 11, 2004, one weekOn November 11, 2004, one week

before the decision is made to reducebefore the decision is made to reducethe QB requirement from 7,200the QB requirement from 7,200 psipsi toto6,4006,400 psipsi,, FasslerFassler does a presentationdoes a presentationon HDB that highlights the connectionon HDB that highlights the connectionbetween QB results below 7,200between QB results below 7,200 psipsi

and HDB failures.and HDB failures.

FasslerFassler instructs his audience only toinstructs his audience only tosend R&D and outside agencies pipesend R&D and outside agencies pipesamples prepared from pipe with asamples prepared from pipe with a

QB result of 7,200 or higher.QB result of 7,200 or higher.



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Internal Recommendation &Internal Recommendation &

Authorization (IRA), dated 11/19/04Authorization (IRA), dated 11/19/04



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JMJMss QB ResultsQB Results Fell Below 7,200Fell Below 7,200 psipsi

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



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

A qualification testA qualification test

Provides best indication of shortProvides best indication of short--termtermtensile strengthtensile strength



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Four Ways We Know JMFour Ways We Know JMConsistently Fails LTSConsistently Fails LTS

1.1. TestimonyTestimony

2.2. Internal testing for lobbying efforts to reviseInternal testing for lobbying efforts to revise

AWWA/ASTM/UL standards to make itAWWA/ASTM/UL standards to make iteasier 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



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Former Corporate QC Supervisor:ormer Corporate QC Supervisor:

From 1997 through 2005 when he departed, JMFrom 1997 through 2005 when he departed, JMwas unable to manufacture pipe that met the ULwas unable to manufacture pipe that met the ULtensile strength requirement. During this periodtensile strength requirement. During this period

100% of the pipe was non100% of the pipe was non--conforming for ULconforming for UL1285.1285.

Former Head of R D:ormer Head of R D:From 1991 through 2002, between 50From 1991 through 2002, between 50--80% of the80% of thepipe produced by JM was nonpipe produced by JM was non--conforming. Fromconforming. From2002 through 2005, 100% of the pipe was non2002 through 2005, 100% of the pipe was non--

conforming.conforming.

1. Testimony re: Percentage of LTS1. Testimony re: Percentage of LTSFailuresFailures



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Testimony re: Cause of LTS FailuresTestimony re: Cause of LTS FailuresSwitch to Cheaper Ingredients in Compound:witch to Cheaper Ingredients in Compound: Former QC Supervisorormer 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 wereregular basis. The compound ingredients were changed becausehanged becausemanagement did everythinganagement did everything on the cheap.n the cheap.

Former Corporate QC Supervisorormer Corporate QC Supervisor:To increase profits management ordered the use of compoundTo increase profits management ordered the use of compoundingredients from a company calledingredients from a company called LuxcoLuxco. These ingredients were. These ingredients wereinferior, and shortly after the changeover toinferior, and shortly after the changeover to LuxcoLuxco the pipe could nothe pipe could nolonger meet the UL 1285 requirement of 7,000longer meet the UL 1285 requirement of 7,000 psipsi. Management. Management

refused to allow him to pursue therefused to allow him to pursue the LuxcoLuxco quality issue.quality issue.

Former Head of R D:ormer 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 thisthisdecision to save money. [R&D] strongly opposed the changedecision to save money. [R&D] strongly opposed the change--overover

because the reduced viscosity reduced tensile strength.because the reduced viscosity reduced tensile strength.



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

(cont(contd)d)

Increased production rates/extruder speeds:ncreased production rates/extruder speeds: Former Head of R Dormer Head of R D:

Pipe produced with extruders that run too fast willPipe produced with extruders that run too fast will

often fail tensile strength tests. The nonoften fail tensile strength tests. The non--conformingconforming

pipe was shipped anyway. This problem emergedpipe 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 Supervisorormer QC Supervisor:The extruders were always run at faster than ratedThe 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.


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3. Claims Testing3. Claims Testing

Occasionally, customers test pipe inOccasionally, customers test pipe inconjunction with a claim for nonconjunction with a claim for non--conformingconformingpipepipe

Pipe fails LTS in large percentage of thesePipe fails LTS in large percentage of theseclaimsclaims

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



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Examples of Failing LTS Results fromExamples 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-14

Tec Utilities

Sample 2: 6,680 psi

Sample 3: 6,750 psi

Sample 4: 6,940 psi

10/31/00

Q02-J-40

Westgate Resorts

6,833 psi 10/01/02

Q05-C-08

Sheldon Site Utilities

Sample 1: 6,777 psi

Sample 2: 6,775 psi

6/9/05

Q05-H-21

Nevada High Desert State

Prison

6,349 psi 12/2/05



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4. Attempted Qualification of 304. Attempted Qualification of 30--inchinch

and 36and 36--inch Pipeinch Pipe

Between 2001 and 2004, JM conducted 11 LTSBetween 2001 and 2004, JM conducted 11 LTS

tests:tests:

97 samples were tested97 samples were testedAll 97 were below 7,000All 97 were below 7,000 psipsi

100% failure rate100% failure rate



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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

Types of CherryTypes of Cherry--Picking and ProcessPicking and Process



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5454Source: JMM122179Source: JMM122179

Types of CherryTypes of Cherry--Picking and ProcessPicking and Process

Modifications Used:Modifications Used: Changes to Extrusion ProcessChanges to Extrusion Process

Increase shear/torque on extruder (to work compound moreIncrease shear/torque on extruder (to work compound more

thoroughly)thoroughly) Slow down extruder speedsSlow down extruder speeds

Replace used Screw & Barrel with new onesReplace used Screw & Barrel with new ones

Changes to Specimen PreparationChanges to Specimen Preparation Change the directional cut from tangential to radialChange the directional cut from tangential to radial

Change the dimensions to equal the thickness of the pipe wallChange the dimensions to equal the thickness of the pipe wall

Changes to CompoundChanges to Compound

Use JM90R compound instead of JM90Use JM90R compound instead of JM90

Eliminate use ofEliminate use of LuxcoLuxco brand multibrand multi--waxwax

Try singleTry single--batch compounding (instead of doublebatch compounding (instead of double--batch)batch)

Example of Process Modification JMExample of Process Modification JM



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Example of Process Modification JMExample of Process Modification JM

Has No Intention of ActuallyHas No Intention of ActuallyImplementingImplementing

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 compoundingbatch compounding half the resinhalf the resin

goes through the hot mixer with all the additives andgoes through the hot mixer with all the additives and

remainder gets added in cold mixerremainder gets added in cold mixer

Cost ProhibitiveCost Prohibitive

To switch to hotTo switch to hot--batching, JM would have to retrofit orbatching, JM would have to retrofit or

replace mixers on extruders at 12 plantsreplace mixers on extruders at 12 plants

E il fE il f F lF l J k H 5/12/03t J k H 5/12/03



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Email fromEmail 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]



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After 11 consecutive failures, JMAfter 11 consecutive failures, JM

abandons 30abandons 30-- & 36& 36--inch project andinch project andwithdraws qualification file at UL.withdraws qualification file at UL.

Si ifi f F il Ob i ULSi ifi f F il Ob i UL



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Significance of Failure to Obtain ULSignificance 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, theseinch pipe, thesefailures translate directly tofailures translate directly toJMJMss other ULother UL--listed products.listed products.

What the failed pipe andWhat the failed pipe andJMJMss ULUL--listed pipe sold during this time periodlisted pipe sold during this time periodhave in common:have in common:

Both were made using the same JM90 compoundBoth were made using the same JM90 compound

Both were made at the same plantsBoth were made at the same plants

Both 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 productsroductsmade 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 productionRemedy known problems with current production

Suspend use of the UL listing/notify UL & customersSuspend use of the UL listing/notify UL & customers

C i LTS R lt fC i LTS R lt f



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Comparing LTS Results fromComparing 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 7,560Range from 7,560 8,7658,765 psipsi Source: UL03116, UL03119, UL03122Source: UL03116, UL03119, UL03122

JM:JM:

Results from Claims, Lobbying and 30Results from Claims, Lobbying and 30-- & 36& 36--inch ULinch UL

Qualification TestingQualification Testing Range from 5,976Range from 5,976 7,0607,060 psipsi

Source: 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



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Forces That Underpin the FraudForces That Underpin the Fraud

1.1. Perverse Bonus SystemPerverse Bonus System

2.2. Managerial Structure Where PlantManagerial Structure Where PlantManagers Override QCManagers Override QC



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1. Bonus System1. Bonus System

AllAll of plant managersof plant managers income is in the form of bonusesincome 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 Pipe

Targets are set for rejects and scrapTargets are set for rejects and scrap

If targets are exceeded, cost of additional loss of material isIf targets are exceeded, cost of additional loss of material is subtractedsubtractedfrom bonusesfrom bonuses

Incentive to Falsify Testing/Analysis of ClaimsIncentive to Falsify Testing/Analysis of Claims Failures determined to be the plantFailures determined to be the plants fault are charged to that plants fault are charged to that plant

Subject pipe is tested by the plant that made the pipeSubject pipe is tested by the plant that made the pipe



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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 significantEmployees 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. Witnesss predecessor at one of thes predecessor at one of theplants did this on a regular basis.plants did this on a regular basis.



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R&D raised the issue that HQ should evaluate theR&D raised the issue that HQ should evaluate the

claim samples; having the plants evaluate the claimclaim samples; having the plants evaluate the claimsamples is an inherent conflict of interest. The plantsamples is an inherent conflict of interest. The plantmanagers objected vigorously.managers objected vigorously. KaushalKaushal RaoRao advisedadvised

that not only does HQ lack the staff but also he agreesthat not only does HQ lack the staff but also he agreeswith the plant managers and trusts them to make thewith the plant managers and trusts them to make theright decision. He then ended this conversation andright decision. He then ended this conversation andstated that there will be no change in this matter andstated that there will be no change in this matter and

the plants will continue to evaluate their ownthe plants will continue to evaluate their owncomplaint samples.complaint samples.

Conflict of Interest re: ClaimsConflict of Interest re: Claims




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Shortage of QC PersonnelShortage of QC Personnel

The quality supervisors asked if they couldThe quality supervisors asked if they could

have more auditorshave more auditorsLin advised that theLin advised that the

number of auditors is set by the budget. Nonumber of auditors is set by the budget. No

promises of any more quality auditors. Barrypromises of any more quality auditors. BarryLin stated that plant managers have theLin stated that plant managers have the

authority to modify the quality auditorsauthority to modify the quality auditors dutiesduties

as they see fit.as they see fit.



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JM Corporate CultureJM Corporate Culture



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6666

J C p CJ p Former Manager of Three PlantsFormer Manager of Three Plants::

JJ--M management conveyed to witness that it did not care about theM management conveyed to witness that it did not care about the quality of pipe thatquality of pipe thatwas shipped and cared only about profits. Overall, he concludedwas shipped and cared only about profits. Overall, he concluded that Jthat J--M is aM is a slickslickcompany 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 aboutcared only aboutprofit, not whether the pipe that was shipped was nonprofit, not whether the pipe that was shipped was non--conforming. Those employeesconforming. Those employeeswho brought issues of pipe quality to managementwho brought issues of pipe quality to managements attention were labeled ass attention were labeled as troubletrouble--makers.makers.

Lin andLin and RaoRao blocked investigation of causes of nonblocked investigation of causes of non--conformity andconformity and

instead 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 plants refusals refusalto perform all required testing, but he was ignored. Witness wato perform all required testing, but he was ignored. Witness was instructed to falsifys instructed to falsifyinspection and test records.inspection and test records.

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

ManagementManagements general attitude was that pipe is good if a customer does nots general attitude was that pipe is good if a customer does not return it.return it.In WitnessIn Witnesss experience with management, they lived by the mottos experience with management, they lived by the motto there is no shamethere is no shamein lying but there is shame in getting caught lying.in lying but there is shame in getting caught lying.

ManagementManagements approach is that pipe is good if customer doesns approach is that pipe is good if customer doesnt return it.t return it.



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JM Pipe Poses a Safety HazardJM Pipe Poses a Safety Hazard

Campbell v. JMCampbell v. JM plaintiff injured by exploding pipeplaintiff injured by exploding pipe OOBartoBartov. JMv. JM plaintiff injured by exploding pipeplaintiff injured by exploding pipe

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

Orange County, FLOrange County, FL explosive ruptureexplosive rupture

National WaterworksNational Waterworks catastrophic blow out,catastrophic blow out,

scattered piecesscattered pieces

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

Sheldon Site UtilitiesSheldon Site Utilities pipe section explodedpipe section exploded

JohnsJohns Manville Recognition of HazardManville Recognition of Hazard



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JohnsJohns--Manville Recognition of HazardManville Recognition of Hazard




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Damages: Contract Price TrebledDamages: Contract Price Trebled

One Measure ofOne Measure of benefit of the bargainbenefit of the bargain

Case law supportCase law support

U.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. vU.S. vAerodexAerodex, 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 overarchingprinciplesprinciples

Estimate of Contract Price MethodEstimate of Contract Price Method



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Estimate of Contract Price MethodEstimate of Contract Price Method

DamagesDamages

Estimated federal sales in subset of dropEstimated federal sales in subset of dropshipments = $ 10.2 millionshipments = $ 10.2 million

Estimate of drop shipments as percentage of allEstimate 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