The U.S. Securities and Exchange Commission (“SEC”) recently filed a law enforcement action for failure to disclose loss contingencies arising out of a pending U.S. Department of Justice (“DOJ”) investigation. This is the first SEC case that directly charges violations of the duties arising out of the requirements to disclose loss contingencies as that term is defined in the accounting literature. The case highlights a difficult issue with which management and counsel are often confronted during ongoing law enforcement investigations: disclosure duties arising from findings made in management’s own internal investigation into the facts, and duties concerning the disclosure of such findings to the government.
The SEC brought the enforcement action against RPM International Inc. (“RPM”) and its general counsel and Chief Compliance Officer Edward W. Moore (“Moore”). The suit alleges that RPM failed to disclose to the SEC and its own audit committee an $11m overcharge to the government that RPM discovered and disclosed during a DOJ investigation into one of RPM’s wholly owned subsidiaries. The DOJ investigation, which began in 2011, culminated in a $61 million False Claims Act (“FCA”) settlement with the DOJ.
According to the SEC’s complaint, RPM, an American multinational company, owns subsidiaries that manufacture and market high-performance coatings, sealants and specialty chemicals, primarily for maintenance and improvement applications. In 2011, DOJ began investigating RPM and its wholly-owned subsidiary in response to a qui tam FCA complaint alleging that the subsidiary overcharged the federal government on certain government contracts.