Earlier this month, the U.S. Securities and Exchange Commission (“SEC”) charged publicly traded RPM International Inc. (“RPM”) and its general counsel with violations of the antifraud provisions of the federal securities laws due to failures to disclose and account for material information related to an ongoing government investigation under the False Claims Act. The SEC alleges that the general counsel advised RPM’s CEO and audit committee of the investigation as early as April 2011, but in subsequent years, the general counsel allegedly failed to inform the company’s CEO, CFO, audit committee and external auditor of particular information known to him that showed RPM’s true financial exposure arising out of the investigation. As a result of the general counsel’s conduct, the SEC alleges that RPM filed various false and misleading reports with the SEC, thereby misleading investors about the company’s financial results, internal controls and the accuracy of its books and records. RPM ultimately restated its financial results. The SEC’s complaint seeks permanent injunctions, disgorgement and financial penalties.
The company and its general counsel dispute the charges and appear to be ready to litigate the claims with the SEC. Nonetheless, the SEC’s decision to pursue charges against in-house counsel for accounting and disclosure violations, while not unprecedented, is fairly uncommon. The SEC complaint suggests that the general counsel was motivated, at least in part, by his personal interest in the value of his holdings of RPM stock and options, but it is not otherwise clear that the general counsel’s conduct was objectively wrong or inconsistent with his professional duties. Until the litigation is completed, it is difficult to draw any firm conclusions as to how in-house counsel should modify behavior when confronted with a similar fact pattern. Still, the case does serve as a reminder to all public companies, including retailers, that in-house counsel might create liability for themselves and the company when preparing SEC disclosures.