United States: SEC Sues Company And Its GC/CCO For Failure To Disclose And Accrue Charge For A Pending DOJ Investigation

On September 9, 2016, the SEC filed a complaint against RPM International Inc. ("RPM") and the company's General Counsel/CCO. The SEC claims the company filed false and misleading SEC filings that failed to disclose any loss contingency relating to a DOJ investigation that the company eventually settled for $60.9 million.  The complaint also charged the GC/CCO, individually, for his failure to inform RPM and its auditors about material facts relating to a DOJ investigation.  RPM and the GC/CCO are contesting the SEC's allegations, and the company has called the case a "product of prosecutorial overreach."

This dispute stems from a 2010 False Claims Act complaint alleging that an RPM subsidiary overcharged the government by failing to provide required price discounts.  The SEC alleges that during the course of the subsequent DOJ investigation, the GC/CCO became aware of facts indicating that potential loss contingency became reasonably probable and reasonably estimable under ASC 450.  The SEC claims that the GC/CCO did not timely disclose facts to RPM management and its auditors, including internal analyses estimating the amount of potential overcharges, and a $27-28 million settlement offer that RPM submitted to the DOJ, three days after filing its second quarter 10-Q on January 8, 2013.  As a result, the SEC claims that RPM's quarterly filings from October 2012 to January 2013 improperly failed to disclose any information about the DOJ investigation, including any loss contingency or accrual on RPM's financial statements.

RPM first disclosed the existence of the investigation in April 2013, and ultimately settled the DOJ action in August 2013 for $60.9 million.  On August 14, 2014, RPM restated its financials for the first three quarters that the DOJ investigation was pending, and acknowledged errors in its related disclosures and accruals.

This SEC Complaint is notable for a number of reasons.

  • First, the SEC has brought claims directly against the individual GC/CCO. We have previously written about types of CCO conduct that could lead to SEC enforcement action. The SEC may have considered the alleged misconduct as a wholesale failure of the individual's compliance responsibilities, a category of conduct that can cause the SEC to pursue individual liability.
  • Second, the complaint serves as a warning that a failure to adequately disclose material facts concerning regulatory/litigation loss contingencies to a company's audit committee or external auditors can potentially lead to individual liability.
  • Finally, the SEC has continued to pursue contested matters under anti-fraud provisions that only require a showing of negligence, which can often lead to similar sanctions under a lower burden than scienter-based charges. The complaint charges the company and the individual with violations of Sections 17(a)(2) and (a)(3) of the Securities Act, which prohibit fraud in the offer or sale of securities, but may be based on negligent conduct—the SEC did not allege claims under Section 10(b) and Rule 10b-5, which would require scienter. In a variety of settings, we expect the SEC to continue to bring cases alleging violations of negligence-based standards.

SEC Sues Company And Its GC/CCO For Failure To Disclose And Accrue Charge For A Pending DOJ Investigation

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