Sec. & Exch. Comm'n v. RPM Int'l, Inc.

• Decision Date: 29 September 2017
• Docket Number: Civil Action No. 16–1803 (ABJ)
• Citation: 282 F.Supp.3d 1
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RPM INTERNATIONAL, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

282 F.Supp.3d 1

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.RPM INTERNATIONAL, INC., et al., Defendants.

Civil Action No. 16–1803 (ABJ)

United States District Court, District of Columbia.

Signed September 29, 2017

Gregory R. Bockin, Timothy K. Halloran, U.S. Securities & Exchange Commission, Herbert Michael Semler, Securities & Exchange Commission, Washington, DC, for Plaintiff.

William H. Wagener, Kerry Anne Tirrell, Pro Hac Vice, Steven Robert Peikin Pro Hac Vice Barry H. Berke, Pro Hac Vice, Darren LaVerne, Pro Hac Vice, Bradley Paul Smith, Sullivan & Cromwell LLP, New York, NY, Marjorie E. Sheldon, Pro Hac Vice, Kramer Levin Naftalis & Frankel LLP, New York, NY, Fritz Edward Berckmueller, Pro Hac Vice, Matthew James Kucharson, Pro Hac Vice, Mitchell Gerald Blair, Pro Hac Vice, CALFEE, HALTER & GRISWOLD LLP, Cleveland, OH, Danny C. Onorato, Shermineh C. Jones, Schertler & Onorato, LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

AMY BERMAN JACKSON, United States District Judge

The Securities and Exchange Commission ("SEC") has brought this action alleging securities violations under the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act"), and the Exchange Act Rules, against defendants RPM International, Inc. ("RPM") and RPM's General Counsel and Chief Compliance Officer, Edward W. Moore ("Moore"). Compl. [Dkt. # 1] ¶¶ 1, 3 8–9, 85–105. The SEC alleges that defendants fraudulently failed to disclose loss contingencies in RPM's SEC filings at a time when they were aware that a qui tam action had been filed against RPM under the False Claims Act, and that the Department of Justice was conducting an investigation to determine whether it would intervene, and even after settlement negotiations between RPM and DOJ were underway. Id. ¶¶ 1–2, 17. The SEC seeks to enjoin RPM and Moore from committing further violations of the securities laws, to disgorge their ill-gotten gains, and to pay civil money penalties. Id. at 27.

On February 17, 2017, RPM filed a motion to dismiss the claims against it pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Notice of Def. RPM International Inc.'s Mot. to Dismiss [Dkt. # 30] ("RPM Mot."). It argues that the SEC failed to state a claim that the company's financial statements were "false" because accounting rules do not "require a company to disclose preliminary settlement offers and because the [c]omplaint does not allege that RPM did not subjectively believe in its accounting treatment." Mem. of P. & A. in Supp. of RPM Mot. [Dkt. # 30] ("RPM Mem") at 2, 4. RPM also contends that Claims 1, 2, and 3 should be dismissed for the independent reason that the complaint fails to plausibly allege that the alleged misstatements were material, and it maintains that Claims 1 and 2 should be dismissed with respect to statements made after October 2012 because the SEC has failed to allege the facts necessary to prove that RPM violated Section 17(a) of the Securities Act. Id. at 4.

Defendant Moore has also filed a motion to dismiss the claims against him pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Def. Edward W. Moore's Mot. to Dismiss [Dkt. # 31] ("Moore Mot."); Mem. of P. & A. in Supp. of Moore Mot. [Dkt. # 31–1] ("Moore Mem.") at 1. Moore argues that the facts in the complaint "fail to establish that the relevant accounting rules required accrual for or disclosure of potential loss associated with the government investigation prior to the date on which RPM did accrue and disclose it," and that, with regard to Claim 1, the SEC has failed to adequately plead that Moore "obtained money or property as a result of RPM's alleged failure to accrue or disclose earlier than it did." Moore Mem. at 2–3.

The SEC opposed both motions in a consolidated brief on March 24, 2017, SEC's Opp. to Defs.' Mots. to Dismiss [Dkt. # 33] ("Pl.'s Opp."), and RPM and Moore each filed a separate reply on April 13, 2017. Reply Mem. of P. & A. in Supp. of RPM Mot. [Dkt. # 34] ("RPM Reply"); Reply Mem. of P. & A. in Supp. of Moore Mot. [Dkt. # 35] ("Moore Reply"). Viewing the facts in the light most favorable to the SEC, as it is required to do at this stage, the Court finds that the SEC has alleged sufficient facts, with the necessary particularity, to state plausible fraud claims against RPM and Moore, and the case will proceed.

BACKGROUND

RPM is a Delaware corporation headquartered in Medina, Ohio that "manufactures and sells various chemical product lines, including paints, protective coatings, roofing systems, sealants, and adhesives." Compl. ¶ 14. In 2007, Moore began serving as RPM's General Counsel and Corporate Secretary, and in 2011, he assumed the additional position of Chief Compliance Officer. Id. ¶ 15.

The instant action stems from a previous lawsuit against RPM and one of its wholly-owned subsidiaries, Tremco, Inc. ("Tremco"), a company that "provides roofing materials and services." Compl. ¶¶ 1–2, 14. In July 2010, a former Tremco employee filed a qui tam complaint under the False Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"), alleging that Tremco overcharged the United States under several government contracts by failing to provide required price discounts. Id. ¶¶ 3, 17. DOJ initiated an investigation into the complaint's allegations in order to decide whether to intervene in the lawsuit. Id. ¶ 17.

RPM learned of the DOJ investigation in March 2011 when it received a subpoena seeking documents regarding RPM's and Tremco's government contracts. Compl. ¶ 18. Moore oversaw the responses of both RPM and Tremco to the DOJ investigation, and he kept RPM senior officials and auditors informed. Id. ¶¶ 2, 17–20. RPM also retained outside counsel to represent it in connection with the DOJ investigation. Id. ¶ 2.

Moore discussed the DOJ investigation at RPM's quarterly Audit Committee meeting on April 5, 2011, and according to the complaint, RPM's outside audit firm asked Moore each quarter to keep it apprised of any new developments in the investigation. Compl. ¶ 22.

I. First Quarter Fiscal Year 2013 (June–August 2012)

On June 7, 2012, the audit firm sent an e-mail to Moore regarding the Form 10–K that was scheduled to be filed with the SEC in July, suggesting disclosure language related to government investigations. Compl. ¶ 26. However, RPM and Moore did not disclose the DOJ investigation in its SEC filing in July. Id. ¶ 27.

On August 9, 2012, DOJ provided RPM with a copy of the qui tam complaint, which the court had partially unsealed so that the government could disclose the existence of the lawsuit to RPM and Tremco. Compl. ¶ 28; see Decl. of William H. Wagener [Dkt. # 30–1] ("Wagener Decl."); Ex. A to Wagener Decl. [Dkt. # 30–2].¹ After learning of the complaint, Moore did not disclose it to RPM's audit firm. Compl. ¶ 29.

II. Second Quarter Fiscal Year 2013 (September–November 2012)

On September 12, 2012, RPM's outside counsel met with DOJ and discussed an analysis prepared by a consultant that calculated that Tremco had overcharged the government by at least $11 million during part of the time period under investigation. Compl. ¶ 30. The SEC claims that RPM's outside counsel informed Moore of what transpired during the meeting, including telling him about the $11 million overcharge discussion. Id. On approximately September 28, 2012, while RPM's audit firm was conducting the company's first quarter review, it asked Moore about the status of the DOJ investigation. Id. ¶ 31. Moore told the firm that " 'no claim has been asserted' and that the matter was 'investigative in nature and not in litigation.' " Id.

Moore sent a management representation letter to the audit firm on October 1, 2012, in connection with the first quarter review, stating that, " 'since June 1, 2012, neither [he], nor any of the lawyers over whom [he] exercise[s] general legal supervision, have given substantive attention to, or represented the [c]ompany in connection with, material loss contingencies' exceeding $1.2 million." Compl. ¶ 32; see Ex. H. to Wagener Decl. [Dkt. # 30–9] ("Ex. H")² That same day, RPM sent DOJ a written analysis, estimating that Tremco overcharged the government by approximately $11.4 million during part of the time period under investigation. Compl.

¶ 33. The following morning, RPM's Audit Committee held its quarterly meeting, but Moore did not disclose the $11.4 million overcharge estimate that had been sent to DOJ. Id. ¶ 34. At the same meeting, the Chairman of the Audit Committee allegedly said that the company was "not going to be accepting of ongoing extraordinary charges or one-time charges" against income because "that would [not] bode well for the company and [ ] the impression of our shareholders and others of how we run the business." Id. ¶ 43. Further, according to the complaint, the $11.4 million overcharge estimate equaled approximately 30% of RPM's net income for the first quarter. Id. ¶ 35.

RPM filed a Form 8–K, signed by Moore, on October 3, 2012, and it filed a Form 10–Q for the first quarter the next day. Compl. ¶ 36. The Form 8–K made no mention of any loss contingency, but the Form 10–Q discussed "contingencies" in the broad sense that RPM is a "party to various claims and lawsuits." Id. ¶¶ 39–40. But RPM did not disclose any information about the DOJ investigation specifically in either filing. Id. ¶ 40. The SEC also alleges that the Form 10–Q "falsely and misleadingly stated that, as of the end of RPM's first quarter, '[RPM's] disclosure controls and procedures were effective.' " Id. ¶ 41.

On October 19, 2012, RPM filed a Prospectus Supplement with the SEC for a $300 million notes offering. Compl. ¶ 42. The Prospectus Supplement incorporated by reference RPM's SEC filings, including the Form 8–K and 10–Q that were filed a few days earlier. Id. Moore oversaw the notes offering, which closed on approximately October 23, 2012. Id.

III. Third Quarter Fiscal Year 2013 (December 2012–February 2013)

On November 5, 2012, DOJ notified...