SEC Settles Case with Company and Its General Counsel Over Disclosure Failures

On Sept. 9, 2016, the SEC brought a lawsuit in federal court in Washington, D.C., against RPM International, Inc., and its general counsel for alleged failure to timely disclose a loss contingency, or record an accrual for an anticipated settlement, to resolve an investigation of the company by the U.S. Department of Justice. The company came under DOJ investigation in 2011 regarding whether it overcharged the government on some government contracts. The SEC alleges that the general counsel knew but failed to disclose to the CEO, CFO, Audit Committee, and independent auditors that RPM had sent the DOJ several analyses showing the overcharges were at least $11.9 million, that RPM agreed to submit a settlement offer to DOJ by a certain date, and that RPM then revised its overcharge estimate up to $27-28 million. The SEC alleges that the general counsel’s failure to disclose these matters resulted in a failure by the company to disclose any loss contingency or accrual on RPM’s financial statements. This made periodic filings the company submitted to the SEC in 2012 and 2013 materially false and misleading. RPM settled the DOJ matter for almost $61 million in Aug. 2013.

The SEC’s complaint alleged violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Section 13(a) of the Securities Exchange Act of 1934 and its corresponding SEC rules. These charges are negligence-based against the general counsel (and a combination of negligence and strict liability against the company). The lack of fraud claims will allow the general counsel to escape being barred from serving as an officer and director of a public company if he is found liable. The SEC is seeking injunctive relief, as well as penalties and disgorgement. The company has stated it intends to vigorously defend. According to RPM’s website, the general counsel continues to serve in that role.