On September 9, 2016, the United States Securities and Exchange Commission (“SEC”) charged RPM International Inc. (“RPM”) and its General Counsel with failing to make proper disclosure regarding an ongoing government investigation and failing to accrue amounts in respect of RPM’s potential liability in its financial statements once the facts became known.

In March of 2011, RPM and its General Counsel became aware following receipt of a Department of Justice (“DOJ”) subpoena of a DOJ investigation into allegations made by an RPM employee that RPM had overcharged the federal government on certain contracts. RPM retained outside counsel to represent it in connection with the DOJ investigation.

RPM’s General Counsel was responsible for keeping RPM’s CEO, CFO, audit committee and external audit firm apprised on the DOJ investigation, but over the following year failed to disclose material facts about the investigation. Specifically, General Counsel was accused of failing to inform them: (1) that RPM sent the DOJ several analyses estimating that its subsidiary overcharged the government by at least $11.9 million; (2) that RPM agreed to submit a settlement offer by a specific date to resolve the DOJ investigation; and (3) that, prior to submitting the settlement offer, RPM’s overcharge estimates increased substantially to at least $27-28 million. Additionally, the General Counsel signed the 8-Ks filed with the SEC that contained RPM’s announcements of its financial results.

External investigation counsel was not involved in advising RPM on its public disclosure obligations respecting the investigation. A separate external firm generally advised RPM on public disclosure, but apparently was also not informed of the facts at issue.

In April of 2013, during the course of settlement negotiations with the DOJ, RPM for the first time, disclosed the DOJ investigation and accrued a liability of $68.8 million in its financial statements. The disclosure did not state that the loss had actually became known considerably earlier, and still did not disclose any material weakness in internal control over financial reporting or disclosure controls. After outside auditors learned when General Counsel actually became aware of the expected losses, the company restated its financial statements for three financial quarters. RPM ultimately settled the matter in August 2013 for approximately $61 million.

Reporting of Potential Regulatory Enforcement

The case serves as a reminder for companies to consider the appropriate point at which potential regulatory enforcement should be disclosed in public filings. A corporation may be liable to shareholders or subject to other sanctions if it fails to properly investigate or disclose allegations of wrongdoing. As we discussed in our previous post, a corporation’s continuous disclosure obligations under Canadian securities legislation may in certain circumstances require disclosure of potential or ongoing regulatory enforcement in its public filings, particularly if the enforcement is or could reasonably be expected to have a significant effect on the corporation’s share prices. Because whether potential wrongdoing constitutes a material fact subject to disclosure obligations will depend on the factual circumstances, companies should carefully evaluate the risk associated with any regulatory action to determine whether it should be disclosed.

Retaining External Counsel

The case is also notable because external counsel did not identify the disclosure concern. Given investigative counsel’s report to the government of the overcharge at issue, it appears to have been aware of the alleged fraud and associated risk but apparently did not identify a disclosure concern presumably because it believed that was outside its responsibility. This highlights the problem of taking a siloed approach when seeking legal advice and the necessity of retaining external counsel on an investigatory matter who will provide integrated advice that encompasses all legal concerns related to the investigation.