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special to the national law journal As general counsel to American Building Control Inc., Karen Austin knows all too well that it is her duty to report internal corporate integrity problems. In the age of Sarbanes-Oxley, Austin knows that if there is a problem, she must immediately raise the issue with her bosses, such as the chief executive officer or the chairman of the board. Last fall, however, that was easier said than done, when Austin fielded outside complaints about the propriety of two corporate purchases. The target: Niklaus F. Zenger, then CEO and chairman of the board. The reports came from former Swiss business associates of Zenger, who spent a great deal of time there. “My problem was the CEO,” said Austin, brought on board as general counsel in July 2001 by a previous management regime at the Lewisville, Texas, maker of security products. Austin’s concern was alleged “related party transactions” involving Zenger and purchases from businesses he may have ties to. Such transactions are not forbidden, but must be reported. If Zenger did not tell American Building Control about his link to the sellers, she said, that was a problem. The inquiry focused on two transactions: Zenger bought $240,000 in computer software for American Building from Swissource A.G., and $154,498 in office furniture for American Building’s Zurich, Switzerland, office. “I’d already been suspicious about the software purchase,” Austin said. Back in August, she wondered about the hefty price and Zenger’s haste to consummate the deal. She said that he denied having any link to the company when she asked about the software deal last summer. A group of shareholders turned up the heat on Nov. 7, 2002, by filing a Schedule 13D with the Securities and Exchange Commission (SEC). The filing called for Zenger’s resignation and the shareholders declared they “no longer have trust or confidence in the issuer’s current Chief Executive Officer and intend to secure his dismissal or resignation as soon as possible.” Swiss sources call About a week later, Austin received calls from sources in Switzerland about Zenger’s supposed interest in the software and furniture deals. The timing could not have been worse. American Building Control was in the final throes of a $36 million deal to sell its closed-circuit television business to Honeywell International Inc. The very survival of American Building hinged on that sale, Austin said. She was in a bind. She had obligations to the company, its shareholders and to the newly minted Sarbanes-Oxley Act of 2002, which requires attorneys who practice before the SEC to report corporate misconduct. She went to Atlanta businessman Bryan Tate, then chairman of American Building Control’s audit committee and now the company’s CEO. In addition to Tate, Austin turned to outside counsel Richard Waggoner, a partner at Dallas’ Gardere Wynne Sewell. “I was asked to keep things very quiet,” she said. “They were negotiating with Nick for his resignation.” Tate would not discuss the case, other than refer to the SEC filings. “We reported the information that we determined to be factual,” he said. Waggoner did not return phone calls. Austin said that when she did finally confront Zenger in mid-November, he threatened to blow up the Honeywell deal and have her fired. “There was a horrible problem . . . .He had friendly board members and he was convinced that I was some kind of insane person,” Austin said. But Austin had the comfort of a contract with the company and the knowledge that Zenger did not have the clout to get rid of her. Another hitch-the furniture and software deals happened in Switzerland, making them tougher to track down. With the audit committee’s green light to pursue Zenger, Austin hired private investigators in Switzerland. “I felt that I was being listened to by the chairman of the audit committee,” Austin said. Which was a good thing-otherwise she was legally required to blow the whistle by going to the government, she said. Meanwhile, there were SEC filings to get out and certify; Austin said that there were no problems with the financial accounting side of the transactions. “We just had to investigate and disclose.” The Swiss investigators turned up more evidence about Zenger’s links to the purchases there, but the company did not have a definitive document, Austin said. Nevertheless, “we felt that we needed to make a disclosure,” she said. American Building Control’s annual report, or 10K, filed with the SEC on April 4 makes those disclosures. “The Company subsequently became aware of allegations that Mr. Zenger was related to the entities that sold the furniture and equipment to the company,” and “has retained a private investigator in Switzerland to investigate Mr. Zenger’s relationship with those entities,” the filing declared. Zenger had already resigned in February. According to the 10K, the company withheld $245,000 from Zenger’s severance due in December 2002, and demanded that Zenger turn over the software so that American Building Control “could have the value of the software independently determined.” The company has yet to see the software, according to the filing. Zenger could not be reached for comment at the cellphone number provided by Austin, who said that Zenger remained in Switzerland after the mid-November 2002 confrontation concerning the Swiss purchases. Beat Marfurt, whose name Austin provided as Zenger’s counsel, said that he was proscribed by law from confirming or denying whether he is Zenger’s attorney. Marfurt is an attorney with the firm of Stampfli & Linder in Berne, Switzerland. Austin’s story was first reported in Texas Lawyer , a sister publication of The National Law Journal.

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