Document:

exv10w2

EXHIBIT 10.2

July 28, 2008

RXi Pharmaceuticals Corporation

One Innovation Drive

Worcester, Massachusetts 01605

     Re: Amendment to Contribution Agreement

Gentlemen:

     This letter will serve to amend in certain respects set forth below the Contribution
Agreement, dated April 30, 2007 (the “Contribution Agreement”), between RXi Pharmaceuticals
Corporation (“RXi”) and CytRx Corporation (“CytRx”). Unless otherwise defined herein, capitalized
terms used in this letter, including Exhibit A hereto, shall have the meanings ascribed to them in
the Contribution Agreement.

     In accordance with Section 7 of the Contribution Agreement, the Contribution Agreement is
hereby amended as follows:

     1. Preemptive Rights. Exhibit A to the Contribution Agreement is hereby amended and
restated in its entirety to read as set forth in Exhibit A to this letter.

     2. No Other Effect. Except as set forth in this letter, including Exhibit A hereto,
the Contribution Agreement shall remain in full force and effect.

[Remainder of page intentionally left blank]

 

 

RXi Corporation

July 28, 2008

Page 2

If the foregoing correctly states the parties’ agreement, please acknowledge the same by signing
and returning a copy of this letter.

	 	 	 	 	 
	 	Very truly yours,

 	 
	 	/s/ Steven A. Kriegsman
 	 
	 	Steven A. Kriegsman 	 
	 	President and Chief Executive
Officer

CytRx Corporation 	 
	 

AGREED AND ACCEPTED: Dated July 28, 2008

	 	 	 	 	 
	 	 
	/s/ Tod Woolf
 	 	 	 
	Tod Woolf, Ph.D.                 	 	 
	President

RXi Pharmaceuticals Corporation 	 	 
	 

 

 

Exhibit A

Form of Registration Rights Terms

REGISTRATION RIGHTS TERMS

SECTION 1. Definitions. As used in this Exhibit, the following terms shall have the following
meanings:

          (a) The term “1934 Act” means the Securities Exchange Act of 1934, as amended.

          (b) The term “Common Stock” means the RXi’s Common Stock, $.0001 par value per share.

          (c) The term “CytRx” means CytRx Corporation and its permitted successors and assigns under
Section 12.

          (d) The terms “register,” “registered,” and “registration” refer to a registration effected by
preparing and filing a registration statement in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement.

          (e) The term “Registrable Shares” means the Common Stock issued to CytRx pursuant to the
Contribution Agreement between RXi and CytRx dated as of January 8, 2007 and the Contribution
Agreement between RXi and CytRx dated as of April 30, 2007 (including the shares issued to CytRx in
September 2007 as reimbursement for expenses pursuant to such agreement) and any Common Stock
issued as a dividend or other distribution with respect to, or in exchange or in replacement of,
such Common Stock.

          (f) The term “Rule 144” means Rule 144 promulgated under the Securities Act.

          (g) The term “SEC” means the Securities and Exchange Commission.

          (h) The term “Securities Act” means the Securities Act of 1933, as amended.

SECTION 2. Request for Registration. If at any time after the Common Stock is registered
under the 1934 Act, RXi shall receive a written request (specifying that it is being made pursuant
to this Section 2 from CytRx that RXi file a registration statement under the Securities Act, or a
similar document pursuant to any other statute then in effect corresponding to the Securities Act,
covering the registration of Registrable Shares the expected price to the public of which equals or
exceeds $1,000,000 (based on the market price or fair value on the date of such request), then RXi
shall promptly use its best efforts to cause all Registrable Shares that CytRx has requested be
registered to be registered under the Securities Act on Form S-1 or any other available form.

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     Notwithstanding the foregoing, (i) RXi shall not be obligated to effect a registration
pursuant to this Section 2 during the period starting with the date sixty (60) days prior to RXi’s
estimated date of filing of, and ending on a date six (6) months following the effective date of, a
registration statement pertaining to an underwritten public offering of securities for the
account of RXi, provided that RXi is actively employing in good faith its best efforts to cause
such registration statement to become effective and that RXi’s estimate of the date of filing such
registration statement is made in good faith; (ii) RXi shall not be obligated to effect a
registration pursuant to this Section 2 within six (6) months after the effective date of a prior
registration under this Section 2 (or three (3) months where, due to the requirements of the SEC or
other factors beyond CytRx’s control, such prior registration included less than all of the
Registrable Shares that CytRx requested to be included therein); and (iii) if RXi shall furnish to
CytRx a certificate signed by the President of RXi stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to RXi or its shareholders for a registration
statement to be filed in the near future, then RXi’s obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed ninety (90) days; provided,
however, that RXi shall not be permitted to so defer its obligation more than once in any 12-month
period.

     RXi shall not be obligated to effect more than three registrations on behalf of CytRx pursuant
to this Section 2. In order to count as a registration under this Section 2, the registration
statement relating to such registration must have included Registrable Shares and must have been
ordered or declared effective by the SEC.

SECTION 3. RXi Registration. If at any time RXi proposes to register any of its Common
Stock under the Securities Act in connection with the public offering of such securities for its
own account or for the accounts of shareholders other than CytRx, solely for cash on a form that
would also permit the registration of the Registrable Shares, RXi shall, each such time, promptly
give CytRx written notice of such determination. Upon the written request of CytRx given within
thirty (30) days after giving of any such notice by RXi, RXi shall, subject to the limitations set
forth in Section 8, use its best efforts to cause to be registered under the Securities Act all of
the Registrable Shares that CytRx has requested be registered; provided, that RXi shall have the
right to postpone or withdraw any registration statement relating to an offering in which CytRx is
eligible to participate under this Section 3 without any liability or obligation to CytRx under
this Section 3.

SECTION 4. Obligations of RXi. Whenever required under Section 2, Section 3 or Section 11
to use its best efforts to effect the registration of any Registrable Shares, RXi shall, as
expeditiously as reasonably possible:

          (a) Prepare and file with the SEC a registration statement with respect to such Registrable
Shares and use its best efforts to cause such registration statement to become effective, and, upon
the request of CytRx, keep such registration statement effective for a period of up to one (1) year
or, if earlier, until the distribution contemplated in the registration statement has been
completed; provided, however, that (i) such one (1) year period shall be extended for a period of
time equal to the period CytRx refrains from selling any securities included in such registration
at the request of an underwriter of Common Stock (or other securities) of RXi; and (ii) in the case
of any registration of Registrable Shares on Form S-3 which are intended to be offered on a
continuous or delayed basis, subject to compliance with applicable SEC rules, such one (1) year
period shall be extended for up to ninety (90) days, if necessary, to keep the registration
statement effective until all such Registrable Shares are sold.

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          (b) Prepare and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement.

          (c) Furnish to CytRx such numbers of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such other documents as
they may reasonably request in order to facilitate the disposition of such Registrable Shares owned
by it.

          (d) Use its best efforts to register and qualify the securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably
appropriate for the distribution of the securities covered by the registration statement, provided
that RXi shall not be required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states or jurisdictions,
and further provided that (anything in this Exhibit to the contrary notwithstanding with respect to
the bearing of expenses) if any jurisdiction in which the securities shall be qualified shall
require that expenses incurred in connection with the qualification of the securities in that
jurisdiction be borne by shareholders, then such expenses shall be payable by CytRx to the extent
required by such jurisdiction.

          (e) Provide a transfer agent for the Common Stock no later than the effective date of the
first registration of any Registrable Shares.

          (f) Otherwise use its best efforts to comply with all applicable rules and regulations of the
SEC.

          (g) Use its best efforts either (i) to cause all such Registrable Shares to be listed on a
national securities exchange (if such securities are not already so listed) and on each additional
national securities exchange on which similar securities issued by RXi are then listed, if the
listing of such securities is then permitted under the rules of such exchange, or (ii) to secure
designation of all such Registrable Shares as a Nasdaq “national market system security” within the
meaning of Rule 11Aa2-1 of the SEC or, failing that, to secure listing on Nasdaq for such
Registrable Shares and, without limiting the generality of the foregoing, to arrange for at least
two (2) market makers to register as such with respect to Registrable Shares with the National
Association of Securities Dealers.

          (h) Enter into such customary agreements (including an underwriting agreement in customary
form) and take such other actions as CytRx shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Shares.

          (i) Make available for inspection by CytRx, by any underwriter participating in any
disposition to be effected pursuant to such registration statement and by any attorney, accountant
or other agent retained by CytRx or any such underwriter, all pertinent financial and other records
and pertinent corporate documents and properties of RXi, and cause all of RXi’s officers, directors
and employees to supply all information reasonably requested by CytRx, underwriter, attorney,
accountant or agent in connection with such registration statement.

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          (j) Use every reasonable effort to prevent the issuance of any stop order suspending the
effectiveness of such registration statement or of any order preventing or suspending the use of
any preliminary prospectus and, if any such order is issued, to obtain the lifting thereof at the
earliest reasonable time.

          (k) Make such representations and warranties to CytRx and the underwriters as are customarily
made by issuers to selling stockholders and underwriters, as the case may be, in primary
underwritten public offerings.

SECTION 5. Furnish Information. It shall be a condition precedent to the obligations of
RXi to take any action pursuant to this Exhibit with respect to the registration of any CytRx’s
Registrable Shares that CytRx shall take such actions and furnish to RXi such information regarding
itself, the Registrable Shares held by it, and the intended method of disposition of such
securities, as RXi shall reasonably request and as shall be required in connection with any
registration, qualification or compliance referred to in this agreement, including, without
limitation (i) in connection with an underwritten offering, enter into an appropriate underwriting
agreement containing terms and provisions then customary in agreements of that nature, (ii) enter
into such custody agreements, powers of attorney and related documents at such time and on such
terms and conditions as may then be customarily required in connection with such offering and (iii)
distribute the Registrable Shares only in accordance with and in the manner of the distribution
contemplated by the applicable registration statement and prospectus. In addition, CytRx shall
promptly notify RXi of any request by the Commission or any state securities commission or agency
for additional information or for such registration statement or prospectus to be amended or
supplemented.

SECTION 6. Expenses of Demand Registration. All expenses incurred in connection with any
registration pursuant to Section 2 or Section 11 (excluding underwriters’ discounts and
commissions), including, without limitation, all registration and qualification fees, printers’ and
accounting fees, fees and disbursements of counsel for RXi, and the reasonable fees and
disbursements of one special counsel for CytRx, shall be borne by RXi whether or not the
registration statement to which such registration expenses relate becomes effective; provided,
however, that RXi shall not be required to pay for any expenses of any registration proceeding
begun pursuant to Section 2 if the registration request is subsequently withdrawn at the request of
CytRx (in which case CytRx shall bear such expenses), unless CytRx agrees to forfeit its right to
demand registrations pursuant to Section 2.

SECTION 7. RXi Registration Expenses. All expenses (excluding underwriters’ discounts and
commissions) incurred in connection with any registration pursuant to Section 3, including, without
limitation, any additional registration and qualification fees and any additional fees and
disbursements of counsel to RXi that result from the inclusion of securities held by CytRx in such
registration and the reasonable fees and disbursements of one special counsel for CytRx, shall be
borne by RXi whether or not the registration statement to which such registration expenses relate
becomes effective.

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SECTION 8. Underwriting Requirements.

          (a)

	 	(i)	 	In connection with any offering under Section 3 involving an underwriting of
shares being issued by RXi, RXi shall not be required to include any Registrable Shares
in such underwriting unless CytRx accepts the terms of the underwriting as agreed upon
between RXi and the underwriters selected by it, and then only in such quantity
(subject to the minimum Registrable Shares to be included as provided in subsection
(ii) below) as will not, in the reasonable opinion of the underwriters, jeopardize the
success of the offering by RXi.
	 
	 	(ii)	 	If the total amount of securities (which for the purposes of this subsection
(ii) refers only to securities owned directly by CytRx Corporation and none of its
transferees, successors or assigns) that CytRx requests to be included in an
underwritten offering under Section 3 exceeds the amount of securities that the
underwriters reasonably believe compatible with the success of the offering, RXi may
exclude from such registration and underwriting such Registrable Shares, provided that
RXi shall only be permitted to exclude such Registrable Shares that exceed fifteen (15)
percent of the total shares included in such registration and underwriting.

          (b) With respect to any underwriting of shares to be registered under Section 2 or Section 11,
CytRx shall have the right to designate the managing underwriter or underwriters, subject to the
consent of RXi. In connection with any underwritings of shares to be registered under Section 3,
RXi shall have the right to designate the managing underwriter or underwriters. In any such case,
such consent of RXi or CytRx shall not be unreasonably withheld or delayed.

SECTION 9. Delay of Registration. CytRx shall not have any right to take any action to
restrain, enjoin, or otherwise delay any registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Exhibit.

SECTION 10. Indemnification. In the event any Registrable Shares are included in a
registration statement under this Exhibit:

          (a) To the extent permitted by law, in connection with any Registration in which Registrable
Shares are included, RXi will indemnify and hold harmless CytRx and its officers, directors and
stockholders, legal counsel and accountants for CytRx, any underwriter (as defined in the
Securities Act) for CytRx and each person, if any, who controls CytRx or underwriter within the
meaning of the Securities Act or the 1934 Act, against any losses, claims, damages or liabilities,
joint or several, to which they may become subject under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are
based on (i) any untrue or alleged untrue statement of any material fact contained in such
registration statement, including, without limitation, any prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the statements therein
not misleading or (iii) any violation by RXi of any rule or regulation promulgated under the
Securities Act applicable to RXi and relating to action or inaction required of RXi in connection
with any such registration; and will promptly reimburse CytRx, and any underwriter, controlling
person or other aforementioned person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such

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loss, claim, damage, liability, or action, provided, however, that the indemnity agreement
contained in this Section 10(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the consent of RXi (which
consent shall not be unreasonably withheld or delayed) nor shall RXi be liable to CytRx, or any
underwriter, controlling person or other aforementioned person in any such case for any such loss,
claim, damage, liability or action to the extent that it (i) arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission made in connection
with such registration statement, preliminary prospectus, final prospectus, or amendments or
supplements thereto, in reliance upon and in conformity with written information furnished to RXi
expressly for use in connection with such registration by or on behalf of CytRx, or any
underwriter, controlling person or other aforementioned person, (ii) is caused by the failure of
CytRx to deliver a copy of the final prospectus relating to such Registrable Shares, as then
amended or supplemented, in connection with a purchase, if RXi had previously furnished copies
thereof to CytRx or (iii) is caused by CytRx’s disposition of Registrable Shares during any period
during which CytRx is obligated to discontinue any disposition of Registrable Shares under Section
13.

          (b) To the extent permitted by law, CytRx will indemnify and hold harmless RXi, each of its
directors, each of its officers who has signed the registration statement, each person, if any, who
controls RXi within the meaning of the Securities Act, and any underwriter (within the meaning of
the Securities Act) for RXi against any losses, claims, damages or liabilities to which RXi or any
such director, officer, controlling person or underwriter may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, including any prospectus or final
prospectus contained therein or any amendments or supplements thereto or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information relating to and furnished to RXi by CytRx
expressly for use in connection with such registration; and will promptly reimburse RXi or any such
director, officer, controlling person or underwriter for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained in this Section
10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of CytRx (which consent shall not be
unreasonably withheld or delayed) and provided further that CytRx shall not have any liability
under this Section 10(b) in excess of the net proceeds actually received by CytRx in the relevant
public offering.

          (c) Promptly after receipt by an indemnified party under this Section 10 of notice of the
commencement of any action, such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 10, notify the indemnifying party in writing
of the commencement thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel

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mutually satisfactory to the parties. The failure to notify an indemnifying party promptly of
the commencement of any such action, if prejudicial to his ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under this Section 10,
but the omission so to notify the indemnifying party will not relieve him of any liability that he
may have to any indemnified party otherwise than under this Section 10.

          (d) If the indemnification provided for in this Section 10 is required by its terms but is for
any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified
party under Section 10(a) or Section 10(b) in respect of any losses, claims, damages, liabilities
or expenses referred to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to herein in such proportion as is appropriate to reflect the
relative fault of RXi and CytRx in connection with the statements or omissions described in such
Section 10(a) or Section 10(b) which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative fault of RXi and
CytRx shall be determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a material fact relates
to information supplied by RXi or CytRx and the parties’ relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in this Section 10, any
legal or other fees or expenses reasonably incurred by such party in connection with investigating
or defending any action or claim. The provisions set forth in Section 10(c) with respect to notice
of commencement of any action shall apply if a claim for contribution is to be made under this
Section 10(d); provided, however, that no additional notice shall be required with respect to any
action for which notice has been given under subsection Section 10(c) for purposes of
indemnification. RXi and CytRx agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined solely by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred to in this
paragraph. Notwithstanding the provisions of this Section 10(d), CytRx shall not be required to
contribute an amount in excess of the net proceeds actually received by CytRx in the relevant
public offering. No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.

SECTION 11. Registrations on Form S-3.

          (a) If (i) RXi shall receive a written request (specifying that it is being made pursuant to
this Section 11) from CytRx that RXi file a registration statement on Form S-3 (or any successor
form to Form S-3 regardless of its designation) for a public offering of Registrable Shares the
reasonably anticipated aggregate price to the public of which would equal or exceed $1,000,000, and
(ii) RXi is a registrant entitled to use Form S-3 (or any successor form to Form S-3) to register
such shares, then RXi shall use its best efforts to cause all Registrable Shares that CytRx has
requested be registered to be registered on Form S-3 (or any successor form to Form S-3).

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          (b) Notwithstanding the foregoing, (i) RXi shall not be obligated to effect a registration
pursuant to this Section 11 during the period starting with the date sixty (60) days prior to RXi’s
estimated date of filing of, and ending on a date six (6) months following the effective date of, a
registration statement pertaining to an underwritten public offering of securities for the account
of RXi, provided that RXi is actively employing in good faith its best efforts to cause such
registration statement to become effective and that RXi’s estimate of the date of filing such
registration statement is made in good faith; (ii) RXi shall not be obligated to effect a
registration pursuant to this Section 11 within six (6) months after the effective date of a prior
registration under this Section 11 (or three (3) months where, due to the requirements of the SEC
or other factors beyond CytRx’s control, such prior registration included less than all of the
Registrable Shares that CytRx requested to be included therein); and (iii) if RXi shall furnish to
CytRx a certificate signed by the President of RXi stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to RXi or its shareholders for a registration
statement to be filed in the near future, then RXi’s obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed ninety (90) days; provided,
however, that RXi shall not be permitted to so defer its obligation more than once in any 12-month
period.

          (c) CytRx’s rights to registration under this Section 11 are in addition to, and not in lieu
of, their rights to registration under Section 2 and Section 3 of this Exhibit.

SECTION 12. Transfer of Registration Rights.

          (a) The registration rights and obligations of CytRx under this Exhibit with respect to any
Registrable Shares may be transferred or assigned to any acquirer of all or substantially all of
the assets or outstanding shares of stock of CytRx or any entity that merges with or into CytRx.

          (b) The registration rights and obligations under Sections 2 and 11 hereof may be transferred
or assigned to one or more transferees of Registrable Shares (while also being retained by CytRx);
provided that RXi shall not be obligated to effect more than three registrations under Section 2 on
behalf of CytRx and those transferees.

          (c) The registration rights and obligations under Section 3 hereof may be transferred or
assigned to any transferee of 0.5% or more of the Registrable Shares at any time.

SECTION 13. Future Events. If CytRx is, at the time participating in a Registration, RXi
will notify CytRx of the occurrence of any of the following events of which RXi is actually aware,
and when so notified, CytRx will immediately discontinue any disposition of Registrable Shares
until notified by RXi that such event is no longer applicable:

          (a) the issuance by the Commission or any state securities commission or agency of any stop
order suspending the effectiveness of the registration statement or the initiation of any
proceedings for that purpose (in which case RXi will make reasonable efforts to obtain the
withdrawal of any such order or the cessation of any such proceedings); or

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          (b) the existence of any fact which makes untrue any material statement made in the
registration statement or prospectus or any document incorporated therein by reference or which
requires the making of any changes in the registration statement or prospectus or any document
incorporated therein by reference in order to make the statements therein not misleading (in which
case RXi will make reasonable efforts to amend the applicable document to correct the deficiency).

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Exhibit 10.1

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

			
	 	 	 
	UNITED STATES OF AMERICA	 	No.
	v.	 	 
	LAWSON PRODUCTS, INC.
	 	Judge

DEFERRED PROSECUTION AGREEMENT

     Defendant LAWSON PRODUCTS, INC. (“LAWSON PRODUCTS”), a company
headquartered in Des Plaines, Illinois, by its undersigned attorneys, pursuant to authority granted
by its Board of Directors, and the UNITED STATES OF AMERICA, through
PATRICK J. FITZGERALD, United States Attorney for the Northern District of Illinois,
enter into this Deferred Prosecution Agreement (“the Agreement”), which shall apply to
LAWSON PRODUCTS and all its affiliates and subsidiaries, including Drummond
American Corporation and Cronatron Welding Systems, Inc. The terms and conditions of
this agreement are as follows:

          LAWSON PRODUCTS accepts and acknowledges that, in connection with the
execution of this Agreement, the United States will file a one-count criminal Information
(attached hereto as Appendix A) in the United States District Court for the Northern District
of Illinois. The Information will charge LAWSON PRODUCTS with mail fraud, in violation
of 18 U.S.C. § 1341. LAWSON PRODUCTS knowingly and voluntarily waives its right to
indictment on this charge, as well as all rights to a speedy trial pursuant to the Sixth
Amendment to the United States Constitution, 18 U.S.C. § 3164, and Federal Rule of

 

 

Criminal Procedure 48(b). Prosecution of LAWSON PRODUCTS on the charge set forth in the Information
shall be deferred for a three-year period. As further provided below, if LAWSON PRODUCTS fully
complies with its obligations under this Agreement during the Agreement’s three-year term, the
United States will dismiss the Information with prejudice.

     2. LAWSON PRODUCTS admits, accepts, and acknowledges that it is responsible for the acts of
its officers, employees, and sales agents, as set forth in the Information and the Statement of
Facts attached as Appendix B to this Agreement (the “Statement of Facts”), and that the facts
described therein are true and accurate. Should the United States initiate the prosecution that is
deferred by this Agreement, LAWSON PRODUCTS agrees that it will neither contest the admissibility
of, nor contradict, in any criminal proceeding or civil forfeiture proceeding, the Statement of
Facts.

     3. LAWSON PRODUCTS agrees to place a total of $30,000,000 in an escrow account to fund the
payment of restitution and a civil forfeiture judgment as further set forth below. LAWSON PRODUCTS
will fund this escrow account in three equal payments of $10,000,000. LAWSON PRODUCTS shall make
the first $10,000,000 payment on or before the date that LAWSON PRODUCTS executes this Agreement.
LAWSON PRODUCTS shall make its subsequent two $10,000,000 payments within twelve months and
twenty-four months of its execution of this Agreement. At any point, should a controlling interest
in LAWSON PRODUCTS be sold, the remaining payments shall be accelerated and due at the closing of
that sale.

 

 

     4. LAWSON PRODUCTS acknowledges that the United States will file a complaint for in rem civil
forfeiture, which is attached as Appendix C to this Agreement (the “Forfeiture Petition”), for
forfeiture of the funds in the escrow account described in paragraph 3. LAWSON PRODUCTS agrees not
to contest the forfeiture of this property in the civil forfeiture proceeding. LAWSON PRODUCTS
further agrees to the entry of a judgment with respect to the civil forfeiture proceeding. LAWSON
PRODUCTS agrees that the funds in the escrow account shall be forfeited and disposed of according
to law. LAWSON PRODUCTS and the United States agree that the forfeiture of the funds in the escrow
account, once fully funded by LAW SON PRODUCTS pursuant to paragraph 3, shall satisfy all monetary
claims by the United States with respect to the civil forfeiture action. Nothing, including a
dismissal of the Information or a breach by LAWSON PRODUCTS of this Agreement, shall cause any
portion of the funds in the escrow account forfeited pursuant to the civil forfeiture judgment to
be refunded. The United States agrees, however, that in the event of a subsequent breach and
prosecution, it will recommend to the Court that the amount forfeited pursuant to this Agreement be
offset against any monetary penalty the Court may impose as part of its judgment. LAWSON PRODUCTS
understands that such a recommendation will not be binding on the Court.

     5. LAWSON PRODUCTS acknowledges that if it were convicted of mail fraud, as charged in the
information, that it would be obligated to provide restitution to the victims of the scheme,
pursuant to 18 U.S.C. § 3663A. The United States and LAWSON

3

 

PRODUCTS have agreed that LAWSON PRODUCTS will make restitution payments to customers of LAWSON
PRODUCTS that (a) employed individuals who received over $10,000 in Winners Choice checks; (b)
employed individuals who have been or later are convicted of mail fraud as a result of their
receipt of Winners Choice checks; or (c) purchased LAWSON PRODUCTS merchandise from sales agents
who have been or later are convicted of mail fraud for providing Winners Choice checks to the
customers’ employees (collectively, “the Victims”). Accordingly, LAWSON PRODUCTS agrees to pay
restitution in a total amount of $806,431, as set out in Appendix D. In making these payments,
LAWSON PRODUCTS further agrees to advise the Victims in writing as to the circumstances leading to
the payments.

     6. LAWSON PRODUCTS hereby represents and warrants that it will not re-employ as an officer or
elect as a director any individual who formerly served in either of those positions, and who left
such a position with the company on or before the date of this Agreement.

     7. This Agreement shall be in effect for three years from the date of its execution (except as
provided below in Paragraph 15 of this Agreement, which provides for earlier termination under
certain circumstances involving a sale of LAWSON PRODUCTS). During the term of this Agreement,
LAWSON PRODUCTS agrees to cooperate fully with the United States Attorney’s Office for the Northern
District of Illinois and any other authority or agency investigating LAWSON PRODUCTS or any of its
present or former

4

 

directors, officers, employees, or sales agents, in any and all matters relating to corrupt
payments or benefits in connection with its sales or operations. LAWSON PRODUCTS agrees that its
cooperation shall include, but not be limited to, the following:

          a. LAWSON PRODUCTS shall provide the United States with all documents and records that the
United States requests and are not subject to valid claims of attorney-client or work product
privileges. The United States shall not assert that any act by LAWSON PRODUCTS known to the United
States as of the date of this Agreement constitutes a waiver of its attorney-client or work product
privileges in any respect as to matters relating to the scheme described in the Information and
Statement of Facts.

          b. LAWSON PRODUCTS shall designate knowledgeable present or Former directors, executives,
officers, or employees to provide the United States with information regarding matters under
investigation that the United States requests. LAWSON PRODUCTS shall use its best efforts to make
available for interviews or testimony, as requested by the United States, present or former
directors, executives, officers, and employees of LAWSON PRODUCTS or any of its present or former
affiliates and subsidiaries. This includes, but is not limited to, sworn testimony before a federal
grand jury or in federal trials, as well as interviews with law enforcement authorities. LAWSON
PRODUCTS will use its best efforts to ensure that the information that it provides in this manner
is complete, truthful, and accurate.

5

 

          c. With respect to any information, testimony, document, record, or other tangible evidence
provided to the United States pursuant to this Agreement, LAWSON PRODUCTS consents to any and all
disclosures to other government agencies, including federal and state agencies, of such materials
as the United States, in its sole discretion, shall deem appropriate.

     8. LAWSON PRODUCTS has implemented and will continue to implement a compliance and ethics
program designed to prevent and detect violations of federal and state anti-corruption laws
throughout its sales and operations, including those by its affiliates and subsidiaries. LAWSON
PRODUCTS has disclosed the components of its compliance and ethics program to the United States.
LAWSON PRODUCTS agrees during the term of this Agreement to immediately notify the United States
Attorney’s Office for the Northern District of Illinois of any violation or suspected violation of
federal and state anti-corruption laws that it receives notice of or detects.

     9. LAWSON PRODUCTS expressly agrees that it shall not, through its present or future
attorneys, directors, executives, officers, or any other person authorized to speak for the
company, make any public statement, in litigation or otherwise, contradicting LAWSON PRODUCTS’s
acceptance of responsibility set forth above or the factual statements set forth in the Statement
of Facts. Any such contradictory statement shall constitute a breach of this Agreement as governed
by Paragraph 13, and LAWSON PRODUCTS thereafter would be subject to prosecution as set forth in
Paragraphs 13 and 14

6

 

of this Agreement. The decision of whether any public statement contradicts the Statement of Facts
shall be solely that of the United States. Should the United States determine that a public
statement by any such person contradicts the Statement of Facts, the United States shall notify
LAWSON PRODUCTS. LAWSON PRODUCTS may avoid a breach of this Agreement by publicly repudiating such
statement within 48 hours after such notification.

     10. If LAWSON PRODUCTS is in full compliance with all of its obligations under this Agreement,
the United States, within thirty days of the expiration of the period set forth in paragraph 7
above, will seek dismissal with prejudice of the Information filed against LAWSON PRODUCTS pursuant
to Paragraph 1 and this Agreement shall expire.

     11. If the United States determines, in its sole discretion, that LAWSON PRODUCTS, at any time
between the execution of this Agreement and completion of defendant’s cooperation, provided
deliberately false, incomplete, or misleading information under this Agreement, has committed any
federal or state crime subsequent to the date of this Agreement, or has otherwise violated any
provision of this Agreement, LAWSON PRODUCTS shall thereafter be subject to prosecution for any
federal criminal violation of which the United States has knowledge. Any such prosecutions may be
premised on information provided by LAWSON PRODUCTS, including the Statement of Facts, which shall
be admissible at any trial of LAWSON PRODUCTS. Moreover, LAWSON PRODUCTS agrees that any
prosecutions that are not time-barred by the applicable statute

7

 

of limitations on the date of this Agreement may be commenced against LAWSON
PRODUCTS in accordance with this Agreement.

     12. Should the United States determine, in its sole discretion, that LAWSON
PRODUCTS has, at any time between the execution and termination of this Agreement as
set forth in paragraph 7, committed any federal or state crime, provided deliberately false,
incomplete, or misleading information under this Agreement, or has otherwise knowingly and
willfully breached any other material provision of this Agreement, the United States shall provide
written notice to LAWSON PRODUCTS of the alleged breach and provide LAWSON PRODUCTS with a two-week
period from receipt of such notice in which to make a presentation to the United States to
demonstrate that no federal or state crime was committed, no breach occurred, or, to the extent
applicable, that the breach was not material or knowingly and willfully committed or has been
cured.

     13. In the event that the United States still determines, in its sole discretion and after
providing LAWSON PRODUCTS with notice of the alleged breach and an opportunity to make a
presentation, that LAWSON PRODUCTS has committed any federal or state crime, provided deliberately
false, incomplete, or misleading information under this Agreement, or has otherwise knowingly and
willfully breached any other material provision of this Agreement: (a) all statements made by or on
behalf of LAWSON PRODUCTS to the United States, the Statement of Facts executed in connection with
this Agreement, and any testimony given by LAWSON PRODUCTS before a grand jury, shall be admissible
in evidence in any criminal proceeding brought by the United States against LAWSON PRODUCTS, and
(b) LAWSON PRODUCTS shall not assert any claim

8

 

that any statements made by or on behalf of LAWSON PRODUCTS are inadmissible or should be
suppressed.

     14. LAWSON PRODUCTS acknowledges that the United States has made no representations,
assurances, or promises concerning what sentence may be imposed by the Court should LAWSON PRODUCTS
breach this Agreement and this matter proceed to judgment. LAWSON PRODUCTS further acknowledges
that any such sentence would be solely within the discretion of the Court and that nothing in this
Agreement binds or restricts the Court in the exercise of such discretion.

     15. LAWSON PRODUCTS agrees that in the event it sells or merges all or substantially all of
its business operations as they exist as of the date of this Agreement, whether such sale is
structured as a stock or asset sale, it shall include in any contract for sale or merger a
provision binding the purchaser or successor to the obligations described in the Agreement;
provided, however, that if there should occur a corporate transaction whereby LAWSON PRODUCTS sells
substantially all of its assets or engages in a merger or similar transaction whereby LAWSON
PRODUCTS is not a surviving corporate entity; and provided the $30,000,000 obligation and
restitution provided for herein in paragraphs 3 and 5 has been paid and satisfied; and further
provided that the new entity controlling the former assets or business of LAWSON PRODUCTS is not
controlled by a person or entity that has a significant previous affiliation with LAWSON PRODUCTS,
then the United States agrees to terminate this Agreement and dismiss the Information within 30
days after the transaction or by August 11, 2009, whichever comes later. In the event that LAWSON
PRODUCTS continues in existence following such sale and is not transferring title to any
substantial portion of its assets

9

 

pursuant to such sale, LAWSON PRODUCTS rather than the purchaser of those assets remains obligated
under the Agreement.

     16. This Agreement is binding on LAWSON PRODUCTS and the United States Attorney’s Office for
the Northern District of Illinois, but specifically does not bind any other federal agencies, or
any state or local law enforcement or regulatory agencies, although the United States Attorney’s
Office for the Northern District of Illinois will bring the cooperation of LAWSON PRODUCTS and its
compliance with its other obligations under this Agreement to the attention of such agencies and
authorities if requested to do so by LAWSON PRODUCTS and its attorneys.

     17. This Agreement is entirely voluntary and represents all the terms of the Deferred
Prosecution Agreement between LAWSON PRODUCTS and the United States Attorney. No modifications or
additions to this Agreement shall be valid unless they are in writing and signed by the United
States Attorney, LAWSON PRODUCTS’s attorneys, and a duly authorized representative of LAWSON
PRODUCTS.

     18. Any notice to LAWSON PRODUCTS under this Agreement shall be given by
personal delivery, overnight delivery by a recognized delivery service, or registered or
certified mail,

10

 

addressed to William Heinz, Jenner & Block, 330 North Wabash Avenue, Chicago, IL 60611.

Notice
shall be effective upon actual receipt by LAWSON PRODUCTS.

AGREED:

     For LAWSON PRODUCTS:

	 	 	 	 	 
	/s/ Thomas J. Neri
 

THOMAS J. NERI

	 	/s/ Williarn D. Heinz
 

WILLIAM D. HEINZ
	 	 
	President and Chief Executive Officer

	 	JENNER & BLOCK	 	 
	Lawson Products, Inc.

	 	Counsel for Lawson Products, Inc.	 	 
	 
	 	 	 	 
	For the UNITED STATES OF AMERICA:
	 	 	 	 
	 
	 	 	 	 
	/s/ Patrick J. Fitzgerald
 

PATRICK J. FITZGERALD

	 	/s/ Brandon D. Fox
 

BRANDON D. FOX
	 	 
	United States Attorney

	 	NANCY MILLER	 	 
	 

	 	KRUTI TRIVEDI	 	 
	 

	 	Assistant United States Attorneys	 	 

11

 

OFFICER’S CERTIFICATE

     I have read this Agreement and carefully reviewed every part of it with counsel for Lawson
Products, Inc. (“Lawson Products”). I understand the terms of this Agreement and voluntarily agree,
on behalf of Lawson Products, to each of its terms. Before signing this Agreement, I consulted with
the attorney for Lawson Products. The attorney fully advised me of Lawson Product’s rights, of
possible defenses, of the Sentencing Guidelines’ provisions, and of the consequences of entering
into this Agreement.

     I have carefully reviewed this Agreement with the Board of Directors of Lawson
Products. I have advised and caused investigative and outside counsel for Lawson Products
to advise that Board fully of Lawson Product’s rights, of possible defenses, of the
Sentencing Guidelines’ provisions, and of the consequences of entering into the Agreement.
No promises or inducements have been made other than those contained in this
Agreement. Furthermore, no one has threatened or forced me or, to my knowledge, any
person authorizing this Agreement on behalf of Lawson Products, in any way to enter into
this Agreement. I am also satisfied with Lawson Product’s representation in this matter.

 

 

I certify that I am an officer of Lawson Products and that I have been duly authorized by Lawson
Products to execute this Agreement on behalf of Lawson Products and all the subsidiaries named
herein.

	 	 	 	 	 
	 	               Lawson Products, Inc.

 	 
	Date: August 11 , 2008 	By:  	/s/ Thomas J. Neri 	 
	 	 	THOMAS J. NERI 	 
	 	 	President and Chief Executive Officer
Lawson Products, Inc. 	 
	 

2

 

Appendix A

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

	 	 	 	 	 	 	 
	UNITED STATES OF AMERICA

	 	 	)	 	 	 
	 

	 	 	)	 	 	 
	v.

	 	 	)	 	 	Violation: Title 18, United States Code,
	 

	 	 	)	 	 	Sections 1341 and 1346
	LAWSON PRODUCTS, INC.

	 	 	)	 	 	 

     The UNITED STATES ATTORNEY charges:

     1. At times material to this count:

          a. Defendant LAWSON PRODUCTS, INC. (“LAWSON PRODUCTS”) was a publicly traded company organized
under the laws of the State of Delaware, with its principal offices in Des Plaines, Illinois.
Defendant LAWSON PRODUCTS was a distributor and marketer of systems, services and products sold to
various entities in the public and private sectors. Defendant LAWSON PRODUCTS was the parent
company of several subsidiaries, including Drummond American Corporation and Cronatron
Welding- Systems, Inc. Defendant LAWSON PRODUCTS generated approximately $400 million in sales
annually.

          b. Defendant LAWSON PRODUCTS had two divisions: maintenance and repair operation (the “MRO
business”) and original equipment manufacturing (the “OEM business”). Defendant LAWSON PRODUCTS
sold its MRO products through sales agents. These sales agents generally were permitted by
defendant LAWSON PRODUCTS to negotiate with its customers over the prices their customers would pay
for defendant LAWSON PRODUCTS merchandise. As a general rule, defendant LAWSON PRODUCTS’s profits
and the sales agents’ commissions were greater if they sold products at higher prices.

 

          c. Defendant LAWSON PRODUCTS maintained programs for its MRO business through which sales
agents could provide items of value to individuals for purchasing defendant LAWSON PRODUCTS
merchandise on behalf of those individuals’ employers (the “Illicit Programs”). Among the Illicit
Programs were Winners Choice, Cavalcade of Awards, LPI, and Spike Special. Defendant LAWSON
PRODUCTS administered these Illicit Programs through its Merchandising Department.

          d. Defendant LAWSON PRODUCTS and its sales agents often provided a greater amount of rewards
through these Illicit Programs if the individuals ordered a greater amount of defendant LAWSON
PRODUCTS merchandise on behalf of their employers. Some defendant LAWSON PRODUCTS sales agents
received training suggesting that they provide the customers’ employees with rewards through the
Illicit Programs totaling approximately four to five percent of the amount of the sale.

          e. Defendant LAWSON PRODUCTS set up “promotional funds” for each sales agent that allowed
defendant LAWSON PRODUCTS and the sales agents to split the cost of the Illicit Programs. When a
sales agent’s customer ordered merchandise, defendant LAWSON PRODUCTS placed a percentage of the
order, based on the amount of commission earned by the sales agent, into the promotional fund, up
to a certain maximum dollar amount. A sales agent could then use the promotional fund to pay for at
least a portion of the costs of items from the Illicit Programs. The sales agent would pay the
remainder of the costs of items from the Illicit Programs out of the commissions the sales agents
earned.

15

 

Winners Choice

          f. Winners Choice was a program in which defendant LAWSON PRODUCTS directed a third-party
named Keogh, Inc. (“Keogh”) to issue checks payable to employees of defendant LAWSON PRODUCTS’s
customers and to retail stores selected by the recipients of the checks. Keogh would mail these
checks to the employees of defendant LAWSON PRODUCTS’s customers, who could then use these checks
to purchase items in the designated retail stores. There were several steps that occurred before
Keogh would issue these checks:

i. Cold Certificates. The first step was for sales agents to place orders for “cold
certificates” with defendant LAWSON PRODUCTS, which would then inform Keogh of the orders. The
sales agents would designate the recipient, the mailing address, the number of cold
certificates, and the denomination of the cold certificates. Although the cold certificates
were limited to $10 or $25 increments, sales agents could order multiple cold certificates
totaling far in excess of $25 to be sent to a recipient.

ii. Redemption of Cold Certificates. Next, Keogh would ship, via mail or courier, the
cold certificates to the recipient at the designated address. Along with the cold
certificates, Keogh sent a list of retail stores participating in the Winners Choice program.
To redeem the cold certificates, the recipient would fill out an order form by selecting a
retail store and the address where Keogh should send the check. The recipient then sent the
order form back to Keogh through the mail.

iii. Checks. Once the recipient had redeemed the cold certificates, Keogh mailed one or
more checks, also known as “hot certificates,” to the recipient. While each check was written
for $50 or less, Keogh could mail multiple checks totaling far in excess of $50 to a
recipient. The checks issued by Keogh would list two payees: (1) the individual recipient and
(2) the retail store designated by the individual recipient. The individual recipient could
then use the checks at the designated retail store.

16

 

Cavalcade of Awards and LPI

     g. Cavalcade of Awards and LPI were programs in which defendant LAWSON PRODUCTS and its sales
agents allowed employees of their customers to select items for themselves from catalogs that were
produced by defendant LAWSON PRODUCTS. While the Cavalcade of Awards and LPI programs included
items, such as tools, that could be used by customers, the catalogs also contained personal items,
such as golf equipment, electronics, and toys. Employees of defendant LAWSON PRODUCTS’s customers
could select items based upon the amount of “points” or “banque notes” they earned through the
amount of purchases the employees caused their employers to make.

Spike Special

     h. Spike Special was a program offered at certain times of the year in which Drummond American
and its sales agents provided items of value to employees of Drummond American’s customers if the
employees purchased a certain amount of a specific item on behalf of their employers during the
time period that the Spike Special was offered. As with the Cavalcade of Awards and LPI programs,
the Spike Special program allowed employees to select items that could be used for their employers,
such as tools, or personal items, such as golf equipment, electronics, and toys.

Policies

     i. Defendant LAWSON PRODUCTS had a policy that purported to bar sales agents from providing
items of value to employees of federal, state, and local government. While this policy existed,
defendant LAWSON PRODUCTS did not have any meaningful safeguards in place to detect whether its
sales agents were providing items of value to employees of federal, state,

17

 

and local government. Additionally, prior to December 15, 2005, defendant LAWSON PRODUCTS generally
took no disciplinary action against sales agents it discovered were providing items of value to
employees of federal, state, and local government.

     j. The employees of defendant LAWSON PRODUCTS customers owed a duty of honest services to the
their employers, which included the duty to provide their employers with undivided loyalty that was
free from conflict of interest between their personal interests and the interests of their
employers. Further, many laws and policies existed that prohibited defendant LAWSON PRODUCTS
customers from accepting anything of value from vendors in exchange for the customers’ business.

	 	2.	 	Beginning no later than 1992 and continuing until approximately December 15,
2005, at Des Plaines and Vernon Hills, in the Northern District of Illinois, and
elsewhere, LAWSON PRODUCTS, INC.,

defendant herein, along with others known and unknown, devised and intended to devise, and
participated in, a scheme and artifice to defraud defendant LAWSON PRODUCTS’s customers of money,
property, and the intangible right to the honest services of their employees, and to obtain money
and property, by means of materially false and fraudulent pretenses, representations, and promises,
as further alleged herein.

     3. It was part of the scheme to defraud that from on or about March 11, 1992 through on or
about December 15, 2005, defendant LAWSON PRODUCTS provided substantial rewards, including
approximately $9.7 million in Winners Choice checks, to employees of its customers in order to
induce them to purchase, and to reward the employees for purchasing, merchandise from LAWSON
PRODUCTS on behalf of their employers.

18

 

     4. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS trained its
sales agents how to discuss its Illicit Programs with its customers’ employees in order to induce
and increase sales.

     5. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS taught its
sales agents to use the Illicit Programs to minimize customer complaints about pricing and price
increases.

     6. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS’s sales agents
occasionally told customers’ employees that the Winners Choice certificates were “cash,”
“non-traceable,” “non-taxable,” and could not be linked to LAWSON PRODUCTS.

     7. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS directed its
sales agents and Keogh to send Winners Choice cold certificates and checks to the home addresses of
the employees of the customers, rather than the customers’ business addresses, to conceal the fact
that defendant LAWSON PRODUCTS and its sales agents were providing items of value to its customers’
employees.

     8. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS sales agents
occasionally ordered Winners Choice cold certificates and checks in the names of the spouses of the
employees of the customers to conceal the fact that defendant LAWSON PRODUCTS and its sales agents
were providing items of value to its customers’ employees.

     9. It was further part of the scheme to defraud that on occasion employees of defendant LAWSON
PRODUCTS’s customers misrepresented to their employers that they had not received anything of value
from LAWSON PRODUCTS.

19

 

     10. It was further part of the scheme to defraud that after its sales agents placed an order
for Winners Choice cold certificates, defendant LAWSON PRODUCTS redacted the name of the customer
from the Winners Choice order forms defendant LAWSON PRODUCTS submitted to Keogh in order to
conceal the fact that defendant LAWSON PRODUCTS and its sales agents were providing items of value
to the customers’ employees.

     11. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS, in order to
conceal the fact that employees of defendant LAWSON PRODUCTS’s customers were receiving benefits
through the Illicit Programs, intentionally did not place defendant LAWSON PRODUCTS’s name or logo
on the Cavalcade of Awards and LPI catalogs.

     12. It was further part or the scheme to defraud that defendant LAWSON PRODUCTS knowingly did
not issue or file Internal Revenue Form 1099s, as it was required to do, for employees of its
customers receiving in excess of $600 a year from the Illicit Programs.

     13. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS improperly
deducted the cost of the Illicit Programs as business expenses on its federal tax returns.

     14. It was further part of the scheme to defraud that defendant LAWSON PRODUCTS
misrepresented, concealed and hid, and caused to be misrepresented, concealed and hidden, the
purposes of and acts done in furtherance of the aforementioned scheme.

     15. As a result of the scheme, defendant LAWSON PRODUCTS obtained in excess of

$30,000,000 to which it was not entitled.

20

 

     16. On or about March 2, 2004, at Woodstock, in the Northern District of Illinois,

LAWSON PRODUCTS,

defendant herein, for the purpose of executing the above-described scheme and attempting to do so,
knowingly caused to be placed in an authorized depository for mail matter, to be sent and delivered
by the United States Postal Service, according to the directions thereon, an envelope from Keogh in
Woodstock, Illinois, containing approximately $1,200 worth of Winners Choice cold certificates,
addressed to the spouse of Ronald Gholdson, an employee for defendant LAWSON PRODUCTS’s customer
Reilly Industries, Inc., at the Gholdsons’ home address in Indianapolis, Indiana.

     In violation of Title 18, United States Code, Sections 1341 and 1346.

	 	 	 	 	 
	 	 	 
	 

	 	UNITED STATES ATTORNEY	 	 

21

 

Appendix B

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES OF AMERICA,

NO

           V.

Judge

LAWSON PRODUCTS, INC.

STATEMENT OF FACTS

     1. LAWSON PRODUCTS, INC. (“LAWSON PRODUCTS”) was a publicly traded company organized under the
laws of the State of Delaware, with its principal offices in Des Plaines, Illinois. LAWSON PRODUCTS
was a distributor and marketer of systems, services and products sold to various entities in the
public and private sectors. LAWSON PRODUCTS was the parent company of several subsidiaries,
including Drummond American Corporation and Cronatron Welding Systems, Inc. LAWSON PRODUCTS
generated approximately $400 million in sales annually.

     2. LAWSON PRODUCTS had two divisions: maintenance and repair operation (the “MRO business”)
and original equipment manufacturing (the “OEM business”). From at least 1992 through on or about
December 15, 2005, LAWSON PRODUCTS’s MRO business engaged in corrupt sales practices carried out
through its MRO sales agents. These sales agents generally were permitted by LAWSON PRODUCTS to
negotiate with its customers over the prices their customers would pay for LAWSON PRODUCTS
merchandise. As a general rule, LAWSON PRODUCTS profits and the sales agents’ commissions were
greater if they sold products at higher prices.

     3. LAWSON PRODUCTS maintained programs for its MRO business through which
sales agents could provide items of value to individuals for purchasing LAWSON PRODUCTS

 

 

merchandise on behalf of those individuals’ employers (the “Illicit Programs”). Among the Illicit
Programs were Winners Choice, Cavalcade of Awards, LPI, and Spike Special. LAWSON PRODUCTS
administered these Illicit Programs through its Merchandising Department until approximately
December 15, 2005, when LAWSON PRODUCTS suspended the Illicit Programs.

     4. LAWSON PRODUCTS and its sales agents often provided a greater amount of rewards through
these Illicit Programs if the individuals ordered a greater amount of LAWSON PRODUCTS merchandise
on behalf of their employers. Some LAWSON PRODUCTS sales agents received training suggesting that
they provide the customers’ employees with rewards through the Illicit Programs totaling
approximately four to five percent of the amount of the sale.

     5. LAWSON PRODUCTS set up “promotional funds” for each sales agent that allowed LAWSON
PRODUCTS and the sales agents to split the cost of the Illicit Programs. When a sales agent’s
customer ordered merchandise, LAWSON PRODUCTS placed a percentage of the order, based on the amount
of commission earned by the sales agent, into the promotional fund, up to a certain maximum dollar
amount. A sales agent could then use the promotional fund to pay for at least a portion of the
costs of items from the Illicit Programs. The sales agent would pay the remainder of the costs of
items from the Illicit Programs out of the commissions the sales agents earned.

     6. LAWSON PRODUCTS trained its sales agents how to discuss its Illicit Programs with its
customers’ employees in order to induce and increase sales. LAWSON PRODUCTS also taught its sales
agents to use the Illicit Programs to minimize customer complaints about pricing and price
increases.

23

 

     7. From the inception of the Illicit Programs until December 15, 2005, LAWSON PRODUCTS’s sales
agents provided items of value of more than a nominal value to purchasing agents for governmental
entities in violation of governmental statutes, rules, and regulations concerning procurement.
During this same period, LAWSON PRODUCTS’s sales agents also provided items of value of more than a
nominal value to private entity purchasing agents who accepted the items without the knowledge and
consent of their employers and in violation of their employers’ procurement policies.

     8. In order to conceal the fact that employees of LAWSON PRODUCTS’s customers were receiving
benefits through the Illicit Programs, LAWSON PRODUCTS intentionally did not place LAWSON
PRODUCTS’s name or logo on the Cavalcade of Awards and LPI catalogs.

     9. LAWSON PRODUCTS had a policy that purported to bar sales agents from providing items of
value to employees of federal, state, and local government. While this policy existed, LAWSON
PRODUCTS did not have any meaningful safeguards in place to detect whether its sales agents were
providing items of value to employees of federal, state, and local government. Additionally, prior
to December 15, 2005, LAWSON PRODUCTS generally took no disciplinary action against its sales
agents who it discovered were providing items of value to employees of federal, state, and local
government. LAWSON PRODUCTS also generally took no disciplinary action against sales agents it
discovered were providing items of value to employees of private companies in violation of those
private companies’ policies.

24

 

Winners Choice

     10. In approximately late 1991 and early 1992, LAWSON PRODUCTS representatives met with
Lawrence Keogh, the President of Keogh, Inc. (“Keogh”), which was in the business of offering an
incentive program called Winners Choice (“WC”). LAWSON PRODUCTS decided to use Keogh’s WC program
as a way to reward the employees of its customers for purchasing LAWSON PRODUCTS merchandise on
behalf of their employers.

     11. LAWSON PRODUCTS directed Keogh to issue checks payable to employees of LAWSON PRODUCTS’s
customers and to retail stores selected by the recipients of the checks. Keogh would mail these
checks to the employees of LAWSON PRODUCTS ‘s customers, who could then use these checks to
purchase items in the designated retail stores. LAWSON PRODUCTS’s sales agents occasionally told
customers’ employees that the Winners Choice certificates were “cash,” “non-traceable,”
“non-taxable,” and could not be linked to LAWSON PRODUCTS.

     12. There were several steps that occurred before Keogh would issue these checks:

          a. Cold Certificates. The first step was for sales agents to place orders for
“cold certificates” with LAWSON PRODUCTS, which would then inform Keogh of the orders. The sales
agents would designate the recipient, the mailing address, the number of cold
certificates, and the denomination of the cold certificates. Although the cold certificates were
limited to $10 or $25 increments, sales agents could order multiple cold certificates totaling far
in excess of $25 to be sent to a recipient.

          b. Redemption of Cold Certificates. Next, Keogh would ship, via mail or
courier, the cold certificates to the recipient at the designated address. Along with the cold
certificates, Keogh sent a list of retail stores participating in the Winners Choice program. To

25

 

redeem the cold certificates, the recipient would fill out an order form by selecting a retail
store and the address where Keogh should send the check. The recipient then sent the order form
back to Keogh through the mail.

          c.
Checks. Once the recipient had redeemed the cold certificates, Keogh mailed one or
more checks, also known as “hot certificates,” to the recipient. While each check was written for
$50 or less, Keogh could mail multiple checks totaling far in excess of $50 to a recipient. The
checks issued by Keogh would list two payees: (1) the individual recipient and (2) the retail store
designated by the individual recipient. The individual recipient could then use the checks at the
designated retail store.

     13. LAWSON PRODUCTS directed its sales agents and Keogh to send Winners Choice cold
certificates and checks to the home addresses of the employees of the customers, rather than the
customers’ business addresses, to conceal the fact that LAWSON PRODUCTS and its sales agents were
providing items of value to its customers’ employees. LAWSON PRODUCTS sales agents occasionally
ordered Winners Choice cold certificates and checks in the names of the spouses of the employees of
the customers to conceal the fact that LAWSON PRODUCTS and its sales agents were providing items of
value to its customers’ employees.

     14. After its sales agents placed an order for Winners Choice cold certificates, LAWSON
PRODUCTS redacted the name of the customer from the Winners Choice order forms that LAWSON PRODUCTS
submitted to Keogh in order to conceal the fact that LAWSON PRODUCTS and its sales agents were
providing items of value to the customers’ employees.

     15. From on or about March 11, 1992 through on or about December 15, 2005,
LAWSON PRODUCTS provided approximately $9.7 million in Winners Choice checks to

 

 

employees of its customers in order to induce them to purchase, and to reward the employees for
purchasing, merchandise from LAWSON PRODUCTS on behalf of their employers.

Cavalcade of Awards and LPI

     16. Cavalcade of Awards and LPI were programs in which LAWSON PRODUCTS and its sales agents
allowed employees of their customers to select items for themselves from catalogs that were
produced by LAWSON PRODUCTS. While the Cavalcade of Awards and LPI programs included items, such as
tools, that could be used by customers, the catalogs also contained personal items, such as golf
equipment, electronics, and toys. Employees of LAWSON PRODUCTS’s customers could select items based
upon the amount of “points” or “banque notes” they earned through the amount of purchases the
employees caused their employers to make.

Spike Special

     17. Spike Special was a program offered at certain times of the year in which Drummond
American and its sales agents provided items of value to employees of Drummond American’s customers
if the employees purchased a certain amount of a specific item on behalf of their employers during
the time period that the Spike Special was offered. As with the Cavalcade of Awards and LPI
programs, the Spike Special program allowed employees to select items that could be used for their
employers, such as tools, or personal items, such as golf equipment, electronics, and toys.

     18. In many instances, LAWSON PRODUCTS provided its customers’ employees with income greater
than $600 a year through these Illicit Programs. As a result, LAWSON PRODUCTS was obligated to
issue and file Internal Revenue Form 1099s for these individuals. On occasion, Lawrence Keogh
suggested to LAWSON PRODUCTS’s merchandising department that Keogh

27

 

could issue and file CRS Form 1099s for these individuals on behalf of LAWSON PRODUCTS. LAWSON
PRODUCTS, however, neither issued nor asked Keogh to issue or file IRS Form 1099s for these
individuals.

     19. LAWSON PRODUCTS improperly deducted the cost of the Illicit Programs as business
expenses on its federal tax returns.

     20. On or about March 2, 2004, at Woodstock, in the Northern District of Illinois, LAWSON
PRODUCTS, knowingly caused to be placed in an authorized depository for mail matter, to be sent and
delivered by the United States Postal Service, according to the directions thereon, an envelope
from Keogh in Woodstock, Illinois, containing approximately $1,200 worth of Winners Choice cold
certificates, addressed to the spouse of Ronald Gholdson, an employee for LAWSON PRODUCTS’s
customer Reilly Industries, Inc., at the Gholdsons’ home address in Indianapolis, Indiana.

	 	 	 	 	 	 	 	 	 
	 

	 	AGREED:	 	 	 	 	 	 
	 

	 	For LAWSON PRODUCTS:	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 

THOMAS J. NERI
	 	 	 	 

WILLIAM D. HEINZ
	 	 
	 

	 	President and Chief Executive Officer
Lawson Products, Inc.
	 	 	 	JENNER & BLOCK

Counsel for Lawson Products, Inc.	 	 

28

 

Appendix C

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES OF AMERICA,

Plaintiff,

v.

FUNDS CONTAINED IN

LASALLE BANK N.A. TRUST NO.

XXXXXX IN THE NAME OF

LAWSON PRODUCTS, INC.

VERIFIED COMPLAINT FOR FORFEITURE 

     The UNITED STATES OF AMERICA, by PATRICK J. FITZGERALD, United States Attorney for the
Northern District of Illinois, for its verified complaint against the above-named defendant
property, alleges in accordance with Supplemental Rule (G)(2) of the Federal Rules of Civil
Procedure as follows:

     1. This complaint for forfeiture is verified by the attached affidavit of
Special Agent Brian Murphy of the Federal Bureau of investigation, which is fully
incorporated herein.

Jurisdiction and Venue

     2. This is an in rem forfeiture action brought pursuant to Title 18, United States Code,
Section 981(a)( 1)(C) for forfeiture of the funds contained in LaSalle Bank N.A. Trust No. XXXXXX
in the name of Lawson Products, Inc. (the “Funds”). This Court has jurisdiction over this civil
asset forfeiture action pursuant to 28 U.S.C. § 1345 and 1355.

     3. This Court has in rein jurisdiction over the defendant property pursuant to Title 28,
United States Code, Section 13 55(b)(1)(A), as certain of the acts giving rise to this forfeiture
action occurred within the Northern District of Illinois.

 

 

     4. Venue is proper under Title 28, United States Code, Section 1395(b) because the Funds
are found in this district.

     5. This forfeiture action in rem is brought pursuant to Title 18, United States Code,
Section 981(a)(1)(C).

Specific Allegations

     6. There is probable cause to believe that Lawson Products, Inc. committed an offense against
the United States, namely, mail fraud, from in or about 1992 to on or about December 15, 2005, in
violation of Title 18, United States Code, Section 1341. Specifically, Lawson Products, Inc.
provided kickbacks and other illegal rewards to its customers’ employees for purchasing
Lawson Products, Inc. merchandise on behalf of their employers. As a result of this scheme, Lawson
Products, Inc. obtained approximately $30,000,000 to which it was not entitled.

     7. On August 11, 2008, the United States filed an information against Lawson Products, Inc.,
charging one count of mail fraud. On August 11, 2008, Lawson Products, Inc. and the United States
entered into a Deferred Prosecution Agreement. Pursuant to the Agreement, Lawson Products has
admitted the factual allegations of the information and the United States has agreed to defer
prosecution for the period of three years from the date of the Agreement, provided that Lawson
Products, Inc. abide by the conditions and requirements of the Agreement.

     8. Further, pursuant to the Agreement, Lawson Products, Inc. agreed to pay to the United
States of America a monetary penalty of $30,000,000, reduced by any restitution payments Lawson
Products, Inc. made to victims of its scheme. Lawson Products agreed to place these funds in
LaSalle Bank N.A. Trust No. XXXXXX in three annual payments, which are to be accelerated if Lawson
Products, Inc. is sold or merged with another company. The parties agreed that the Funds

 

 

would be subject to forfeiture in a separately tiled civil complaint. Lawson Products agreed to
the entry of a judgment and agreed that the Funds shall be forfeited and disposed of according to
law.

     9. By reason of the foregoing, there is probable cause to believe that the defendant property
constitutes or is derived from proceeds traceable to violations of Title 18, United States Code,
Section 1341 (mail fraud), and is subject to forfeiture pursuant to Title 18, United States Code,
Section 981(a)(1)(C).

     WHEREFORE, the UNITED STATES OF AMERICA prays:

     A. That the defendant property be proceeded against for forfeiture and condemnation, that a
warrant of seizure and monition issue and that due notice be given to all interested parties to
appear and show cause why the forfeiture should not be decreed; and

     B. That the court adjudge and decree that the defendant property be forfeited to the United
States and disposed of according to law.

	 	 	 	 	 
	 	Respectfully submitted,

PATRICK J. FITZGERALD

United States Attorney

 	 
	 	By:  	s/Brandon D. Fox
 	 
	 	 	BRANDON D. FOX 	 
	 	 	Assistant United States Attorney 219
South Dearborn, Room 500 Chicago,
Illinois 60604
(312) 353-5277 	 
	 

3

 

NORTHERN DISTRICT OF ILLINOIS

ss
COUNTY OF COOK

AFFIDAVIT OF BRIAN MURPHY 

     BRIAN MURPHY, being duly sworn under oath, deposes and states as follows:

     1. I am a Special Agent with the Federal Bureau of Investigation in Rolling Meadows,

Illinois. I have been employed in this capacity for approximately 17 years.

          As part of my duties, I have participated in investigations of individuals involved in alleged
criminal violations, including mail fraud, wire fraud, and bribery offenses. Through my training
and experience and discussion with other law enforcement officers, I am familiar with the methods
and practices used by individuals involved in violations of these and other federal and state law
as it relates to their financial affairs.

     3. I have read the complaint in this matter. The facts alleged are true and correct to the
best of my knowledge and belief based upon my own personal knowledge as well as information I have
received from other agents, persons, and documents.

     4. I declare under penalty of perjury under the laws of the United States of America that
the foregoing is true and correct.

	 	 	 	 	 
	 
	 

	 	 

BRIAN MURPHY, Special Agent 
Federal
Bureau of Investigation
	 	 

SUBSCRIBED and SWORN to before me

this
                    
day of
                                        

                                                                           

                                                            

               NOTARY PUBLIC

 

 

APPENDIX D

	 	 	 	 	 	 	 	 	 
	Moog, Inc.
	 	$	110,530	 	 	 	 	 
	Vertellus
	 	$	97,760	 	 	07  CR 235
	Silberline Manufacturing
	 	$	41,195	 	 	 	 	 
	Ada S. McKinley Community Services
	 	$	28,625	 	 	07  CR 234
	US Steel
	 	$	29,475	 	 	 	 	 
	International Paper
	 	$	27,625	 	 	 	 	 
	Wesley Commons
	 	$	23,700	 	 	 	 	 
	Cumming, Inc., Nelson Filter Division
	 	$	23,325	 	 	 	 	 
	Caesar’s Palace
	 	$	22,925	 	 	 	 	 
	ATC/Vancom
	 	$	22,000	 	 	 	 	 
	Veteran Affairs Medical Center, Buffalo, NY
	 	$	21,875	 	 	 	 	 
	IGI Labs
	 	$	21,550	 	 	 	 	 
	Mittal Steel
	 	$	21,400	 	 	 	 	 
	Victaulic
	 	$	21.375	 	 	 	 	 
	Wheatland Tube
	 	$	20,400	 	 	 	 	 
	Humboldt Utilities/Wastewater
	 	$	19,625	 	 	 	 	 
	United Technologies
	 	$	19,475	 	 	 	 	 
	ACW Management
	 	$	18,325	 	 	 	 	 
	Maine Medical Center
	 	$	16,850	 	 	 	 	 
	Hamilton college
	 	$	15,675	 	 	 	 	 
	Town of Clay
	 	$	15,575	 	 	 	 	 
	Michael Stores
	 	$	15,195	 	 	 	 	 
	Bowdoin College
	 	$	14,775	 	 	 	 	 
	Lenape Regional High School District
	 	$	13,525	 	 	 	 	 
	General Motors – Electromotive Division
	 	$	12,075	 	 	 	 	 
	Foremost Farms, USA Coop
	 	$	12,000	 	 	 	 	 
	Unit Corp
	 	$	11,160	 	 	 	 	 
	City of Long Beach
	 	$	4,575	 	 	07  CR 214
	Spaulding County Corrections
	 	$	10,550	 	 	 	 	 
	Mount Vernon Mills
	 	$	10,100	 	 	 	 	 
	Illinois School District U-46
	 	$	9,875	 	 	 	 	 
	Marymount University
	 	$	7,555	 	 	 	 	 
	Logan County (IL) Housing Authority
	 	$	7,475	 	 	 	 	 
	Macon County (IL) Highway Department
	 	$	4,525	 	 	 	 	 
	Mattoon (IL) School District
	 	$	4,300	 	 	 	 	 
	Chicago Heights (IL) Fire Department
	 	$	3,496	 	 	07  CR 232
	Village of Hazel Crest, IL
	 	$	3,600	 	 	07  CT 232
	Orland Park (IL) Park District
	 	$	1,495	 	 	07  CR 232
	Lincoln (IL) High School
	 	$	3,400	 	 	 	 	 
	Village of Ramsey, IL
	 	$	3,225	 	 	 	 	 
	St. Mary’s Hospital (Decatur, IL)
	 	$	3,225	 	 	 	 	 
	City of Blue Island, IL
	 	$	3,125	 	 	07  CR 234
	Dayton Metropolitan Housing Authority
	 	$	3,030	 	 	 	 	 
	Village of New Lenox, IL
	 	$	2,615	 	 	07  CR 232
	Village of Rosemont, IL
	 	$	1,200	 	 	 	 	 
	City of Elgin, IL
	 	$	1,050	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total
	 	$	806,431

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