SEC Issues Cease and Desist Order to Watts Water Technologies

13 November 2011 Publication

On October 13, 2011, the SEC issued an administrative cease and desist order against Massachusetts-based Watts Water Technologies, Inc. (“Watts”) and a former Watts employee, Leesen Chang, related to violations of the FCPA’s books and records and internal control provisions. According to the SEC’s order, the violations related to corrupt payments made by employees of Watts’ wholly-owned Chinese subsidiary, Valve Changsha Co., Ltd., (“CWV”), which produces and supplies large valve products for infrastructure projects in China.

The order alleges that the payments were made to certain employees of Chinese state-owned design institutes for the purpose of influencing the design institutes to recommend CWV valve products for infrastructure projects and to create design specifications that favored CWV valve products, leading to profits for Watts of more than $2.7 million.  

Specifically, the order alleges that the payments were facilitated by a sales incentive policy adopted by CWV that provided that all sales-related expenses, including travel, meals, entertainment, and payment of “consulting fees” to design institutes, would be borne by the CWV sales employees out of their commissions, which were equal to 7% to 7.5% of the contract price. The sales policy allowed CWV sales personnl to utilize their commissions to make payments to design institutes of up to 3% of the total contract amount. The SEC’s order states that the payments were disguised as sales commissions in CWV’s books, amounting to books and records violations.

In addition, the order alleges that Leesen Chang, a U.S. citizen and the former interim general manager of CWV and vice president of sales for Watts’ management subsidiary in China, approved many of the commission payments that he knew included payments to the design institutes, and even signed commission approval requests that itemized payments of 3% to the design institutes. The order also alleges that Chang knew that Watts’s U.S. management was unaware of the sales policy, and resisted at least one attempt by his Watts China colleagues to have the policy translated and submitted to U.S. management for approval.

Watts agreed to penalties of $3.7 million. It will disgorge $2,755,815, pay prejudgment interest of $820,791, and pay a $200,000 penalty. Chang personally will pay a $25,000 penalty. In settling the changes, the order states the SEC took into consideration Watts’s prompt remedial actions and the company’s cooperation with the SEC’s investigation following its self-disclosure. 

A copy of the cease and desist order against Watts Water Technologies, Inc. and Leesen Chang is attached.