The following is a reposting of the International Based on Alleged Disclosure and Accounting Failures, Apparently in Violation of Corporate Reporting and Disclosure Requirements, written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.
On September 9, 2016, the U.S. Securities and Exchange Commission (SEC) filed civil fraud charges against Edward W. Moore, who serves as general counsel for the Ohio-based chemical products company, RPM International Inc. The 28-page complaint accuses Moore of violating “antifraud, books and records, and misleading accountant or auditor provisions of the securities laws” based on his alleged failure to disclose a material loss contingency, or record an accrual for, a government investigation when required to do so.
Beginning in 2011, RPM and one of its subsidiaries, Tremco, were under investigation by the U.S. Department of Justice (DOJ) for overcharging the government by at least $11.9 million on various roofing contracts. According to the SEC, Moore oversaw RPM’s response to the investigation, but failed to keep senior management and auditors abreast of material facts regarding the investigation and did not inform shareholders of the investigation in a timely manner. As a result, when RPM settled for $60.9 million in 2013, the company had not established a reserve to make the payment.
Knowing that disclosure of the investigation could cause reputational harm to the company, the agency alleges that Moore chose to downplay the situation to protect his own financial position. At the time, Moore held over $1.8 million worth of RPM’s stock. The SEC further stated that in the last few months of 2012 “Moore was aware of pressure to avoid, or at least postpone, recording another one-time charge,” after the company disclosed two one-time charges unrelated to the DOJ investigation totaling $56 million.
As a result of Moore’s conduct, the SEC contends that RPM submitted “false and misleading filings” from October 2012 through December 2013. Because the $11.9 million estimate was equal to 30 percent of its first quarter revenues, it was “material” and therefore needed to be disclosed.
This is a unique case where the SEC takes action against an individual corporate officer, alleging that he caused a company’s failure to disclose an investigation and settlement, in violation of the notoriously broad corporate disclosure requirements. According to the complaint, the agency now claims that “A public company facing a loss contingency, such as a lawsuit or a government investigation, is required under accounting principles and the securities laws to (1) disclose the loss contingency if a material loss is reasonably possible, and (2) record an accrual for the loss contingency if a material loss is probably and reasonably estimable.”
RPM CEO and chairman Frank C. Sullivan has issued a statement that these accusations by the SEC “have absolutely no merit and are the product of prosecutorial overreach. We intend to vigorously defend ourselves and expect our position to be vindicated in court.”
A copy of the complaint is available at: https://www.sec.gov/litigation/complaints/2016/comp23639.pdf