19 September 2016

SEC Files Civil Claims Against General Counsel For Mishandling Internal Investigation And Securities Disclosures

Duane Morris LLP


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This is not the first time that a company's General Counsel has been a named defendant in a civil action brought by the SEC.
United States Corporate/Commercial Law
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This is not the first time that a company's General Counsel has been a named defendant in a civil action brought by the SEC. However, it is notable because the claims are entirely focused on in-house counsel's management of an internal investigation and the company's SEC disclosure obligations.

On September 9, 2016, the U.S. Securities and Exchange Commission ("SEC") charged Ohio-based chemical company RPM International Inc. ("RPM") and its General Counsel with violations of antifraud provisions of the Securities Act and Exchange Act due to failures to disclose and account for material information related to an ongoing government investigation and sealed qui tam case.1 The enforcement action centers entirely on the General Counsel's conduct in overseeing the government investigation and related qui tam case and the company's SEC disclosures. The action thus raises key issues for in-house counsel and their outside counsel assisting with government investigations and securities disclosures, including the disclosure of sealed qui tam cases to external auditors, the attorney-client relationship and obligations of communication and confidentiality under the rules of professional conduct.

The SEC's Allegations

In July 2010, a former employee of RPM's subsidiary filed a sealed qui tam complaint contending that the subsidiary overcharged the government. In 2011, the U.S. Department of Justice ("DOJ") commenced an investigation of those claims. RPM and the General Counsel became aware of the DOJ's investigation in March 2011, upon receipt of a subpoena from the DOJ. RPM retained outside counsel in connection with the DOJ investigation; it also had separate outside securities disclosure counsel.

The SEC contends that the General Counsel advised RPM's CEO and audit committee of the DOJ investigation as early as April 2011, but then, over the next year, the General Counsel is alleged to have failed to inform RPM's CEO, CFO, audit committee and external auditing firm of particular information known to him that showed RPM's true financial exposure arising out of the DOJ investigation and qui tam action. Specifically, by September 2012, the General Counsel is alleged to have known the subsidiary overcharged the government by at least $11 million, which RPM's outside counsel itself communicated to the DOJ. The General Counsel did not inform the external audit firm of this potential loss contingency and signed SEC filings in October 2012 that did not account for such accrual. By December 2012, the General Counsel is alleged to have known the overcharges were now estimated to be approximately $28 million, but again did not inform the outside audit firm or the company's audit committee, CFO or CEO of the expected losses. The asserted misrepresentations and omissions caused RPM to omit disclosure of the material loss contingency presented by the DOJ investigation and to not record an accrual for the alleged loss, in violation of securities laws and governing accounting principles.

The company's CEO and CFO are alleged to have become aware of the sizable loss arising from the DOJ investigation only shortly before or after RPM made a settlement offer to the DOJ of $28 million in early 2013. By April 2013, RPM had reached a settlement with the DOJ for $68.8 million and, for the first time, recorded an accrual for that amount on its books. RPM's public SEC filing in April 2013 also disclosed the DOJ investigation and related accrual for the first time, though the qui tam action remained partially sealed. Through 2013, RPM's SEC filings included the accrual for the DOJ settlement, but still attributed the accrual to early 2013 when the settlement was reached, as opposed to when the loss contingency actually became known; and still did not disclose any material weaknesses in RPM's internal financial reporting and disclosure controls. By August 2014, RPM's outside auditors came to learn when the General Counsel actually became aware of the expected losses from the DOJ investigation in 2012. RPM then restated its financial results for three financial quarters and filed amended SEC filings for those quarters, disclosing for the first time that the DOJ investigation and related accruals occurred during those quarters.


This is not the first time that a company's General Counsel has been a named defendant in a civil action brought by the SEC.2 However, it is notable because the claims are entirely focused on in-house counsel's management of an internal investigation and the company's SEC disclosure obligations. The decisions the General Counsel allegedly made—whether to disclose the sealed qui tam action to external auditors, and whether to report a DOJ investigation in SEC filings—are decisions that in-house counsel face regularly. Those decisions are not cut-and-dried and instead require case-by-case determinations. This action appears to suggest that in making those determinations, in-house counsel might create liability for the company and personal liability for themselves. The SEC's complaint clarifies that the SEC believes that the General Counsel's conduct was motivated by personal gain, particularly due to an incentive compensation plan and two stock offerings during the investigation period. However, it is not as clear-cut that the General Counsel's legal conclusions were objectively wrong or inconsistent with his fiduciary duties.

The case also raises a number of practical concerns for clients responding to DOJ or other government investigations.

  • Disclosure Obligations: Generally, sealed qui tam actions qualify as loss contingencies because they involve "pending or threatened litigation." Yet, disclosure of the sealed action to external auditors may be restricted by the court's order sealing or partially sealing the action. It is a company's obligation to pursue disclosure if necessary, which may even require the company to seek a court order in the qui tam action permitting such disclosure. If the government has already initiated its own investigation of the allegations in the qui tam action and served a subpoena on the company, the company may have already publicly disclosed such pending government investigation in its SEC filings. 

Here, some amount of information regarding the government investigation was apparently disclosed to RPM's external auditors, and there are no allegations that the SEC filings in 2011 and early 2012 were deficient. What this action clarifies is that the disclosure requirements between sealed qui tam actions and government investigations vary, and the scope of what must be disclosed will be highly fact-specific. Advice from experienced legal counsel may be required. 

  • Information Management: The SEC does not allege how RPM's outside counsel handling the DOJ investigation or its other outside counsel handling RPM's securities disclosures advised the General Counsel, nor what information the General Counsel or RPM provided to its securities disclosure counsel. However, the allegations suggest a significant absence of coordination between the separate outside counsel. All counsel (in-house counsel, government investigation counsel and securities disclosure counsel) should strive to coordinate communication to prevent accidental (or intentional) nondisclosures or misrepresentations. 

The SEC's allegations in the complaint against RPM rely heavily on statements made by RPM's counsel to the DOJ investigators. This serves as a reminder to both counsel involved in government investigations and securities disclosures that the DOJ and SEC will share information and cross-reference disclosures to catch discrepancies. 

  • Undermining the Attorney-Client Privilege: While overseeing the internal investigation responding to the DOJ's subpoena and the qui tam action, the General Counsel was also Chief Compliance Officer. During the internal investigation, the General Counsel may have received significant amounts of information that would otherwise be protected by the attorney-client privilege. Once the General Counsel is charged with civil claims based upon conduct in which the client was involved, the General Counsel would be ethically and legally entitled to reveal otherwise privileged information, to the extent necessary for his defense.3 Prosecutors and the SEC should take this into consideration before targeting chief compliance officers and in-house counsel that manage government investigations. To do so risks undermining effective compliance programs that rely on the attorney-client privilege. 
  • Professional Conduct Compliance: The allegations against RPM and the General Counsel raise a number of questions regarding in-house counsel's compliance with the Rules of Professional Conduct. The case involves in-house counsel's obligation under Rule 1.13(b), whether to raise the expected loss related to the DOJ investigation with the CEO or higher authority in the company.4 However, it also relates to a General Counsel's obligation under Rule 1.4(a)(3) to communicate with his or her client and keep the client reasonably informed—in this case, regarding the progress of the government investigation.5 General Counsel should be aware that "the client" is the corporation acting through its board of directors.

If you have any questions about this Alert, please contact Marvin G. Pickholz, Brendan Ruddy, any of the attorneys in the White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Practice Group or the attorney in the firm with whom you are regularly in contact.


1 The action is Securities and Exchange Commission v. RPM International, Inc., et al., Case No. 1:16-cv-01803 (D.D.C.). A copy of the complaint is available here:

2 See e.g., Securities and Exchange Commission v. Faulkner, et al., Case No. 3:16-cv-01735-D (N.D. Tex.) (press release:; Securities and Exchange Commission v. Bailey, et al., Case No. 4:16-cv-00023 (N.D. Fla.) (press release:

3 See ABA, Model Rules of Prof. Conduct, Rule 1.6(b)(5).

4 See ABA, Model Rules of Prof. Conduct, Rule 1.13(b).

5 See ABA, Model Rules of Prof. Conduct, Rule 1.4(a)(3).

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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