Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, October 14, 2011

SEC & Watts Water Technologies Settle FCPA Charges

The SEC settled charges against Watts Water Technologies, Inc. (Watts) and a former employee, Leesen Chang, arising out of violations of the FCPA through a former Watts’ subsidiary in China, Watts Valve (Changsha) Co., Ltd. (CWV). As described in the Commission’s Order, CWV produced and supplied large valve products for infrastructure projects that were constructed and developed by state-owned entities in China. Between 2006 and 2009, employees of CWV made improper payments to employees of certain state-owned design institutes in order to influence the design institutes to recommend CWV valve products to the state-owned customers and to create design specifications that favored CWV valve products. The improper payments were facilitated by a sales incentive policy at the subsidiary that permitted sales employees to use their sales commissions to make payments to design institutes of up to three percent of the total contract amount. As a result, payments to design institute were recorded in CWV’s books and records as commissions, causing Watts’ books and records to be inaccurate. Chang, a U.S. citizen and the former vice president of sales for Watts’ management subsidiary in China, approved commission payments that itemized payments to design institutes and knew or should have known that the payments were improperly recorded as commissions.

As further described in the Commission’s Order, although Watts failed to implement a system of FCPA compliance and internal controls commensurate with the risks posed by CWV when it acquired the subsidiary, upon discovering the violations in 2009, the company voluntarily self-reported the improper payments, shared the results of its internal investigation and further cooperated with the Commission staff’s investigation. The company also promptly undertook numerous remedial measures.

Watts and Chang, without admitting or denying any of the findings in the Order except as to the jurisdiction of the Commission over them, consented to the entry of the Order that orders Watts to pay disgorgement of $2,755,815, prejudgment interest of $820,791 and a $200,000 penalty, orders Chang to pay a $25,000 penalty, orders Watts and Chang to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and orders Chang to cease and desist from committing or causing any violations and future violations of Exchange Act Rule 13b2-1.

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