Does China Valves Comply With The Anti-Corruption Laws?

Richard X Roe profile picture
Richard X Roe

China Valves (OTC:CVVT) is a manufacturer based in China. In the 10K filed November 21, it noted in the risks section that a

failure to comply with the United States Foreign Corrupt Practices Act ["FCPA"] and Chinese anti-corruption laws could subject [the company] to penalties and other adverse consequences.

The company had never discussed FCPA risks in its previous filings with the SEC.

The reason for the new risk disclosure is not stated in the filing, but it must be related to the February 2010 acquisition of Changsha Valve, a former wholly-owned Chinese subsidiary of Watts Water Technologies (WTS). Last month the Securities and Exchange Commission ("SEC") issued a Cease-and-Desist Order (.pdf) ("Order") asserting violations of the Foreign Corrupt Practices Act (“FCPA”). The SEC found that Changsha Valve sales personnel had been making improper payments to state-owned entities in order to win business for years until WTS management discovered the conduct and reported it to the SEC and investors in July 2009.

A review of disclosures, including correspondence between CVVT and the SEC made public in late September, indicates that CVVT management may have reinstated Changsha Valve's practice of paying bribes as soon as the acquisition was complete, while actively trying to conceal it from investors and regulators. The clues come from CVVT flipflopping on the reasons for the acquisition, repeated denials that any violations have occurred, and Changsha Valve's sales commissions since the acquisition.

Conflicting reasons for the unusual acquisition process

CVVT acquired Changsha Valves through an intermediary shell company set up by the wife of CVVT's largest shareholder, making it difficult for investors (and regulators) to establish the link to WTS disclosures about the FCPA violations until an 8K/A was filed in November 2010. Moreover, CVVT changed its story about the reasons for the unusual shell-company arrangement three times

This article was written by

Richard X Roe profile picture
Mr. Roe has over 25 years of US and international investment experience, on the sell side, buy side, and as an individual investor. On the long side, he looks for value and compelling catalysts. On the short side, his current interest is in various companies worth zero.

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