United States: Misleading Disclosure About Governmental Investigations

The Securities and Exchange Commission recently charged government contractor RPM International Inc. and its general counsel and compliance officer Moore for failing to disclose a material loss contingency related to a government investigation.

From 2011 through 2013, RPM and one of its subsidiaries (Tremco) were under investigation by the U.S. Department of Justice. Tremco had allegedly overcharged the federal government on certain government contracts (false claims). RPM settled the case with the DOJ for USD 60.9 million in 2013.

According to the recent SEC order, Moore failed to disclose material facts to auditors and the market, including that:

  • RPM sent DOJ several analyses estimating that Tremco overcharged the government by at least USD 11.9 million
  • RPM agreed to submit a settlement offer by a specific date to resolve the DOJ investigation
  • Before submitting this offer, RPM's overcharge estimates increased substantially to at least USD 27-28 million

In addition, the SEC alleged that Moore had made material misrepresentations to auditors about the DOJ investigation. This case highlights that companies and executives should pay careful attention to how they communicate internally, to third parties and to the market about pending governmental investigations. Failing to do so could lead to a separate violation of applicable disclosure obligations.

What happened chronologically according to according to the SEC order:

  • March to April 2011 – RPM learned of the DOJ investigation into Tremco. Moore oversaw RPM and Tremco's response and was required in his role as general counsel and compliance officer to keep RPM's CEO, CFRO, the audit committee and representatives of the audit firm reasonably informed about the DOJ investigation. Moore discussed the DOJ investigation at the quarterly audit committee meeting, where they asked him for an update on at least a quarterly basis.
  • June 2012 – The auditors sent Moore an e-mail about a FORM 10-K that was to be filed in July 2012. They attached an example disclosure relating to another public company under investigation by the SEC. RPM and Moore decided against disclosing the DOJ investigation.
  • September 2012 – RPM's counsel, with Moore's knowledge and authorisation, met with the DOJ to discuss the case. RPM's counsel informed the DOJ that Tremco had not complied with the pricing terms of its government contracts. In that meeting, they also prepared an analysis of the amount that Tremco had overcharged the government: at least USD 11 million (this only included part of the time period under investigation). Moore was informed about the details of this meeting. The auditors asked Moore about the status of the investigation and Moore told them: "no claim has been asserted" and that the matter was "investigative in nature and not in litigation."
  • October 2012 – Moore sent a representation letter to the auditors about the potential loss (USD 1.2 million) relating to the DOJ investigation. During the quarterly audit meeting, Moore again failed to disclose the USD 11 million overcharge estimated RPM filed a Form 8-K and a Form 10-Q but failed to disclose any information about the investigation.
  • January 2013 – RPM submitted a settlement proposal of USD 28.3 million to the DOJ.
  • 29 March – A settlement counteroffer of USD 71 million was made by the DOJ
  • 4 April 2013 – RPM filed Form 8-K and Form 10-Q and for the first time publicly disclosed the investigation and related accrual.
  • 28 August 2013 – RPM and the DOJ settled for USD 60.8 million.
  • Summer 2014 – The auditors learned new facts about the DOJ investigation and hired a law firm which conducted an independent investigation.
  • August 11 2014 – RPM was directed by the auditors to restate first, second and third quarters of fiscal year 2013.

In a separate matter, the German newspaper Handelsblatt and other news outlets in July 2016 reported about ThyssenKrupp and its former compliance staff who allegedly tried to cover up evidence of cartel involvement. The case involved Bremen prosecutors who started an investigation into a joint venture between Airbus and ThyssenKrupp. The investigation included the compliance staff and a former chief compliance officer at the company who allegedly knew about the corruption but refrained from acting to stop the bribery. According to these news outlets, the former compliance officer is denying the accusations.

Take away

These cases highlight the fact that both the company and its executives must communicate in an accurate manner about pending governmental investigations. This needs to be done internally and externally. Failure to do so may lead to the violation of disclosure obligation under applicable legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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