December 23, 2020

Following privilege battle, SEC announces $2 million settlement for compliance failures

On December 23, 2020, the US Securities and Exchange Commission announced a settlement with RPM International Inc. and the company’s general counsel and chief compliance officer, Edward Moore.  The case originated from a 2011 False Claims Act investigation of RPM and its subsidiary, Tremco, Inc.; that investigation was resolved in 2013, and resulted in a payment of nearly $61 million.

According to the SEC, during the FCA investigation, which was overseen by Moore, the latter failed to disclose material facts about the investigation to the company’s chief executive officer, chief financial officer, audit committee, and independent auditors.  Specifically, as alleged in the SEC’s complaint filed in September 2016, Moore knew, but failed to inform the necessary persons, that RPM had sent the US Department of Justice several estimates showing approximately $11.9 million of overcharges, and later sent larger overcharge estimates of up to $28 million.  In addition, according to the allegations, Moore made material misrepresentations to RPM’s independent auditors, resulting in the submission of materially false and misleading filings with the SEC in 2012 and 2013, and even after the company disclosed and accrued for the DOJ investigation, its filings remained inaccurate as to the timing of the disclosure.  Finally, RPM failed to disclose material weaknesses in its internal controls over financial reporting or its disclosure controls.  The complaint alleges that these failures by RPM violated the antifraud, reporting, books and records and internal controls provisions of the securities laws, and that Moore’s conduct violated antifraud, books and records, and misleading accountant or auditor provisions of the securities laws.

During the four years of litigation prior to settlement, RPM sought unsuccessfully to prevent disclosure to the SEC of nineteen interview memoranda prepared by the company’s outside counsel.  The witness interviews and corresponding memoranda were the result of an investigation requested by RPM’s audit committee into RPM’s obligation to disclose or accrue for the DOJ investigation prior to the third quarter of 2013, following the outside auditor’s refusal to sign off on RPM’s Form 10-K for the relevant period.  When production of these memoranda was first requested by the SEC, RPM redacted all of the witness’ statements.  In response, the SEC moved to compel production of the memoranda with redactions limited to attorney mental impressions.  On February 12, 2020, the US District Court for the District of Columbia granted the SEC’s motion to compel production of all nineteen interview memoranda, rejecting RPM’s claim of work product and attorney client privilege over the memoranda despite their having been prepared by RPM’s outside counsel.  The court found that (1) work product privilege did not apply, or if it did apply, had been waived, and (2) RPM had waived attorney client privilege by disclosing the contents of the memoranda to the company’s outside auditors.

On February 18, 2020, RPM moved the court to certify an interlocutory appeal and stay the production order, or for a writ of mandamus.  On March 5, 2020, the court denied RPM’s motion, noting that the company had not met its burden of establishing either the existence of a substantial ground for dispute regarding the issues to be appealed, or that an immediate appeal will promote efficient resolution of the case, as required by 28 USC § 1292(b).  The court reiterated that the interview memoranda were prepared in conjunction with an internal investigation conducted by outside counsel at the request of the company’s auditors for the purpose of making accurate SEC filings – and not in anticipation of litigation.  Moreover, the results of the investigation were shared with the company’s auditors, who were authorized to share the substance of these results with the SEC.

Concluding the litigation on December 22, 2020, RPM and Moore agreed to a permanent injunction from violating the reporting and books and records provisions of the securities law, and to the payment of a penalty of $2 million and $22,500 respectively.

SEC litigation release | Final judgment | 

Complaint | Order denying interlocutory appeal |