Citations
- 282 F. Supp. 3d 1
Full opinion text
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]. 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") 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 RPM that the seal on the qui tam complaint was set to expire on January 17, 2013, and that the DOJ wanted to resolve the matter by that date or be in a position to inform the court of its intervention determination. Compl. ¶ 46. On December 14, 2012, RPM sent DOJ another analysis, calculating that Tremco overcharged the government by at least $11.9 million. Id. ¶ 48. According to the complaint, Moore understood that DOJ typically seeks to settle FCA cases for at least two times the amount of damages (in light of the triple damages multiplier available under the statute), and that he was also aware that the amount was likely to continue to rise. Id. ¶¶ 47-48. And a few days later, RPM informed DOJ that it would submit a settlement offer by January 11, 2013. Id. ¶ 49.
On December 21, 2012, RPM discussed its exposure in the matter with its outside counsel, and it concluded that $27-28 million was a fair estimate, not including any damages multiplier. Compl. ¶ 50. One week later, Moore sent another management representation letter to the audit firm in connection with the second quarter review, stating again that he had not given any substantive attention, or represented the company in connection with, material loss contingencies in excess of $1.2 million. Id. ¶ 51. The SEC also alleges that in response to the audit firm's inquiry about the DOJ investigation, Moore told the firm that "no claim has been filed" and "no loss contingency exists." Id. ¶ 52.
According to the complaint, RPM's Audit Committee held its second quarterly meeting on January 4, 2013, during which Moore did not disclose: (1) any of the overcharge estimates that had been communicated to DOJ, (2) the fact that RPM had told DOJ that it would submit a settlement offer by January 11, 2013, or (3) the fact that the estimated settlement offer had reached $27-28 million. Compl. ¶ 53. And Moore did not disclose any of this information prior to RPM filing its Form 8-K, or Form 10-Q, for the second quarter on January 8, 2013. Id. ¶¶ 53-54. Further, the SEC filings did not disclose any information relating to the DOJ investigation, and the Form 10-Q just contained the same "contingencies" disclosure that was in the first quarter filing. Id. ¶¶ 56-58. The SEC claims that as of January 8, 2013, Moore had not disclosed the qui tam complaint to the audit firm, and had only told the firm that the range of loss for the DOJ investigation was approximately $5 million. Compl. ¶¶ 53, 60. The agency also alleges that on January 10, 2013, Moore told RPM's CEO for the first time that the potential loss for the DOJ investigation could reach $28 million. Id. ¶ 61.
IV. The Settlement and RPM's Third Quarter and Fiscal Year End Filings
On January 11, 2013, RPM submitted a settlement proposal to DOJ, offering to settle the investigation and underlying qui tam case for $28.3 million. Compl. ¶ 62. Two months later, on March 29, 2013, DOJ provided a counter-offer of $71 million. Id. ¶ 64. On April 1, 2013, RPM accrued a $68.8 million liability for the DOJ investigation, and it publicly disclosed this information in its third quarter Form 8-K and Form 10-Q on April 4, 2013. Id. ¶¶ 64-65. RPM's Form 10-Q reported a net loss of $42.2 million for the third quarter, compared to a net income of $7.9 million for the same quarter one year earlier. Id. ¶ 65. The Form 10-Q stated that the " 'primary driver of the decline' was the $68.8 million accrual for the DOJ investigation," and the SEC alleges that both filings "misleadingly indicated that RPM had timely disclosed and accrued for the DOJ investigation." Id. At the time RPM made the disclosure, the qui tam complaint remained under seal. Id. ¶ 66.
The SEC alleges that while RPM's audit firm was preparing its audit for the fiscal year ended May 31, 2013, it met with Moore on June 10, 2013 to inquire about the timing of RPM's accrual for the DOJ investigation. Compl. ¶ 67. According to the complaint, Moore told the audit firm that after RPM's Form 10-Q was filed on January 8, 2013, "RPM completed additional pricing calculations for certain years under investigation[,] and the government threated to unseal the FCA complaint," and therefore the company decided to make a settlement offer. Id. The SEC claims that these statements were materially false and misleading because RPM told DOJ that it would make a settlement offer on December 19, 2012, and not after the Form 10-Q was filed, and because Moore did not disclose that the overcharge estimates had reached $27-28 million by the time RPM filed its Form 10-Q on January 8, 2013. Id. ¶ 68.
On July 24, 2013, RPM filed its Form 10-K for the fiscal year ended May 31, 2013. Compl. ¶ 69. This filing disclosed the DOJ investigation and related accrual that RPM recorded in its third quarter, but the SEC alleges that the Form 10-K "misleadingly indicated that RPM timely disclosed and accrued for the DOJ investigation in the third quarter, when in fact disclosure and accrual were required in the first two quarters." Id. The agency also claims that the Form 10-K "misleadingly failed to disclose any material weakness in RPM's internal control over financial reporting at any point during the fiscal year, when in fact such weakness existed." Id.
At some point in July 2013, RPM paid Moore a cash bonus of $300,000 for the fiscal year ended May 31, 2013, which was partially based on RPM's financial performance. Compl. ¶ 70. In August 2013, RPM and DOJ formally settled the DOJ investigation and underlying qui tam complaint for approximately $61 million. Id. ¶¶ 2, 71.
On December 5, 2013, RPM filed a Prospectus Supplement with the SEC for a $200 million notes offering, which ended on approximately December 9, 2013. Compl. ¶ 72. Moore oversaw the notes offering, and reviewed the Prospectus Supplement, which the SEC alleges incorporated by reference RPM's false and misleading SEC filings. Id.
On April 8, 2014, RPM's CFO and Moore met with the audit firm to discuss a Form S-3 registration statement that RPM intended to file after obtaining the auditor's approval. Compl. ¶ 76. In answering the auditors' questions, Moore allegedly told them that (1) on December 19, 2012, the range of reasonably possible loss for the DOJ investigation was $0 to $10 million; (2) that range stayed the same through January 8, 2013; and (3) the range of loss went up to $28 million, and became probable, between January 8 and 11, 2013. Id. The audit firm provided its consent for the Form S-3 that day, and RPM then filed it with the SEC. Id. ¶ 77. But, according to the SEC's account of events, this description is inaccurate because RPM sent the SEC a written chronology of events related to the DOJ investigation on March 31, 2014, which stated that on "December 19, 2012, RPM and Tremco informed the DOJ that a settlement proposal would be submitted by January 11, 2013." Id. ¶¶ 73-74. Moore allegedly reviewed and authorized the chronology before it was sent to the SEC. Id. ¶ 73.
In July 2014, RPM paid Moore a cash bonus of $400,000 for the fiscal year ended May 31, 2014. Compl. ¶ 78. The SEC alleges that Moore received the bonus based in part on RPM's financial performance during the fiscal year, which was bolstered by the December 2013 notes offering. Id.
V. RPM's Financial Restatements
In July 2014, RPM's Audit Committee hired independent counsel to conduct an investigation of RPM's disclosure and accrual for the DOJ investigation. Compl. ¶ 79. On August 10, 2014, the independent counsel reported that by the end of the third week of December 2012, it "became 'known to Ed Moore' that RPM's financial exposure in the DOJ investigation was 'going to jump' from around $11 million to around $28 million; that RPM's securities '[d]isclosure counsel [was] not aware' of the overcharge estimates sent to DOJ; and that Moore made 'mistakes,' including 'no disclosure to [the Audit Firm] or audit committee' at the Audit Committee meeting on January 4, 2013." Id. ¶ 80. The next day, the Audit Committee directed RPM to restate its financial statements for the first three quarters of fiscal year 2013 by (1) accruing an $11.4 million liability in the first quarter; (2) accruing a $16.9 million liability in the second quarter; and (3) reducing RPM's $68.8 million accrual in the third quarter by $28.3 million, for a total of $40.5 million. Id. ¶ 81.
On August 14, 2014, RPM filed a Form 8-K, which admitted that RPM made "errors" in disclosing and accruing for the DOJ investigation, and it filed amended Form 10-Q's for each quarter in fiscal year 2013. Compl. ¶¶ 82-83. The SEC alleges that the "restatement was necessary because RPM's disclosure and accounting errors were material." Id. ¶ 82.
VI. The SEC's Complaint
The SEC's complaint consists of seven claims:
Claim 1: against RPM and Moore alleges that statements contained in the Form 8-K, Form 10-Q, and Prospectus Supplement filed in October 2012; Form 8-K and Form 10-Q filed in January 2013; Form 8-K and Form 10-Q filed in April 2013; Form 10-K filed in July 2013; and the Prospectus Supplement filed in December 2013, were false and misleading in violation of Section 17(a)(2) of the Securities Act. (Compl. ¶¶ 85-87).
Claim 2: against RPM and Moore alleges that they engaged in a course of conduct that operated or would operate as a fraud or deceit upon the purchaser of securities in violation of Section 17(a)(3) of the Securities Act. (Compl. ¶¶ 88-90).
Claim 3: against RPM alleges that statements contained in the Form 8-K, Form 10-Q, and Prospectus Supplement filed in October 2012; Form 8-K and Form 10-Q filed in January 2013; Form 8-K and Form 10-Q filed in April 2013; Form 10-K filed in July 2013; and the Prospectus Supplement filed in December 2013, were inaccurate in violation of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. (Compl. ¶¶ 91-93).
Claim 4: against RPM alleges that the company did not maintain its books and records in reasonable detail, and did not accurately and fairly reflect the transactions of the company, in violation of Section 13(b)(2)(A) of the Exchange Act. (Compl. ¶¶ 94-96).
Claim 5: against RPM alleges that the company did not devise and maintain a system of internal accounting controls in violation of Section 13(b)(2)(B) of the Exchange Act. (Compl. ¶¶ 97-99).
Claim 6: against Moore alleges that he falsified or caused to be falsified RPM's books and records in violation of Exchange Act Rule 13b2-1. (Compl. ¶¶ 100-02).
Claim 7: against Moore alleges that he made false and misleading statements to accountants in connection with the review or examination of RPM's financial statements in violation of Exchange Act Rule 13b2-2(a). (Compl. ¶¶ 103-05).
STANDARD OF REVIEW
I. Rule 12(b)(6) Standard
"To survive a [ Rule 12(b)(6) ] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In Iqbal , the Supreme Court reiterated the two principles underlying its decision in Twombly. "First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions," and "[s]econd, only a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 678-79, 129 S.Ct. 1937.
A claim is facially plausible when the pleaded factual content "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678, 129 S.Ct. 1937, citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. , quoting Twombly , 550 U.S. at 556, 127 S.Ct. 1955. A pleading must offer more than "labels and conclusions" or a "formulaic recitation of the elements of a cause of action," id. , quoting Twombly , 550 U.S. at 555, 127 S.Ct. 1955, and "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. , citing Twombly , 550 U.S. at 555, 127 S.Ct. 1955.
When considering a motion to dismiss under Rule 12(b)(6), the Court is bound to construe a complaint liberally in the plaintiff's favor, and it should grant the plaintiff "the benefit of all inferences that can be derived from the facts alleged." Kowal v. MCI Commc'ns Corp. , 16 F.3d 1271, 1276 (D.C. Cir. 1994). Nevertheless, the Court need not accept inferences drawn by the plaintiff if those inferences are unsupported by facts alleged in the complaint, nor must the Court accept plaintiff's legal conclusions. See id. ; see also Browning v. Clinton , 292 F.3d 235, 242 (D.C. Cir. 2002). In ruling upon a motion to dismiss for failure to state a claim, a court may ordinarily consider only "the facts alleged in the complaint, documents attached as exhibits or incorporated by reference in the complaint, and matters about which the Court may take judicial notice." Gustave-Schmidt v. Chao , 226 F.Supp.2d 191, 196 (D.D.C. 2002), citing EEOC v. St. Francis Xavier Parochial Sch. , 117 F.3d 621, 624-25 (D.C. Cir. 1997).
II. Rule 9(b) Standard
Federal Rule of Civil Procedure 9(b) imposes heightened pleading standards in fraud cases, as plaintiffs must "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). However, "the rule specifically allows allegations of'intent, knowledge, and other condition of mind' to be averred generally." U.S. ex rel. Totten v. Bombardier Corp ., 286 F.3d 542, 552 (D.C. Cir. 2002) (applying Rule 9(b) to claims under the False Claims Act), quoting Fed. R. Civ. P. 9(b). This means that the degree of scienter involved or required for a particular cause of action is not determinative of whether Rule 9(b) applies. See id. Rather, the circumstances that must be pled "with specificity are matters such as the 'time, place, and contents of the false representations,' such representations being the element of fraud about which the rule is chiefly concerned" Id. (emphasis in original); see also Kowal , 16 F.3d at 1278 ("[T]he pleader must state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud."), quoting United States v. Cannon , 642 F.2d 1373, 1385 (D.C. Cir. 1981).
The D.C. Circuit applies Rule 9(b)'s pleading standards to claims of misrepresentation under Section 10(b) of the Exchange Act. See Kowal , 16 F.3d at 1278. The majority of circuits have held that Rule 9(b) applies to claims under the Securities Act as well if they "sound in fraud," even if a plaintiff need only allege negligence to state a claim. See, e.g., Rombach v. Chang , 355 F.3d 164, 170-71 (2d Cir. 2004) ("So while a plaintiff need allege no more than negligence to proceed under Section 11 and Section 12(a)(2), claims that do rely upon averments of fraud are subject to the test of Rule 9(b)."); In re Stac Elecs. Secs. Litig ., 89 F.3d 1399, 1404-05 (9th Cir. 1996) ; Melder v. Morris , 27 F.3d 1097, 1100 n.6 (5th Cir. 1994) ; Shapiro v. UJB Fin. Corp. , 964 F.2d 272, 288 (3d Cir. 1992) ("[W]hen § 11 and § 12 claims are grounded in fraud rather than negligence, Rule 9(b) applies"). But see In re NationsMart Corp. Secs. Litig ., 130 F.3d 309, 314 (8th Cir. 1997) (holding that "the particularity requirement of Rule 9(b) does not apply to claims under § 11 of the Securities Act, because proof of fraud or mistake is not a prerequisite to establishing liability under § 11").
The D.C. Circuit has yet to rule on this issue, but courts in this district have held plaintiffs alleging violation of the Securities Act to the heightened pleading standard. See Hite v. Leeds Weld Equity Partners, IV, LP , 429 F.Supp.2d 110, 115 (D.D.C. 2006) (noting that an action under Section 12(a)(2) of the Securities Act must satisfy Rule 9(b)'s requirements); In re U.S. Office Prods. Secs. Litig. , 326 F.Supp.2d 68, 82 (D.D.C. 2004) (observing that "the D.C. Circuit has never stated whether Rule 9(b)'s requirement of particularity applies to claims of violation of Sections 11 and 12(a)(2) of the Securities Act," but that many other circuits have applied Rule 9(b) to those claims).
With regard to claims under Section 17(a)(2) and 17(a)(3) of the Securities Act specifically, which only require allegations of negligence, courts have required the plaintiff to meet Rule 9(b)'s heightened pleading standard. See, e.g., SEC v. Wey , 246 F.Supp.3d 894, 2017 WL 1157140, at *8 (S.D.N.Y. 2017) (dismissing the misrepresentation claim under Section 17(a)(2) because it did not meet Rule 9(b)'s requirements); SEC v. Thompson , 238 F.Supp.3d 575, 591 (S.D.N.Y. 2017) (concluding that Section 17(a) claims "all sound in fraud," so they must be pled with particularity).
The gravamen of the SEC's action under Section 17 here is fraud, and the agency does not argue that applying Rule 9(b) to Claims 1 or 2 would be inappropriate other than in a vague footnote in its opposition. See Pl.'s Opp. at 14 n.16. Therefore, the Court will utilize the heightened pleading standard as set out in Rule 9(b) to evaluate defendants' motions to dismiss those claims. However, the remaining claims-which are based on Section 13 of the Exchange Act-will be evaluated under the traditional Rule 12(b)(6) standard.
ANALYSIS
I. The SEC has stated a claim against RPM and Moore under Section 17(a)(2) of the Securities Act in Claim 1.
"The Securities Act imposes liability for material misrepresentations or deceit in connection with a securities offering." Weiss v. SEC , 468 F.3d 849, 855 (D.C. Cir. 2006). Section 17 is a key enforcement provision of the Securities Act, and Section 17(a)(2) provides:
It shall be unlawful for any person in the offer or sale of any securities ... by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly ... to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
To state a claim under Section 17(a)(2), the SEC must show that defendants were engaged in the offer or sale of securities, that they made material misrepresentations or omitted material facts necessary to make other statements not misleading, and that defendants obtained money or property through the use of the misstatements or omissions. Id. ; see also SEC v. Current Fin. Servs., Inc ., 100 F.Supp.2d 1, 6 (D.D.C. 2000) ; SEC v. Better Life Club of Am., Inc. , 995 F.Supp. 167, 175 (D.D.C. 1998). One need not demonstrate knowledge of wrongdoing or scienter to establish a violation of Section 17(a)(2); proof of negligence is sufficient. Aaron v. SEC , 446 U.S. 680, 696, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980) (concluding that Section 17(a)(2) "is devoid of any suggestion whatsoever of a scienter requirement"); Weiss , 468 F.3d at 855 ; SEC v. Steadman , 967 F.2d 636, 643 (D.C. Cir. 1992) (observing that under this provision, a company is "liable merely for omitting disclosure of liabilities negligently-in other words, for failing to disclose liabilities about which [it] should have known") (emphasis in original).
The SEC alleges that RPM and Moore made material misstatements or omissions in nine SEC filings between October 2012 and December 2013. See Compl. ¶¶ 36, 42, 54, 65, 69, 72.
October 2012 Filings
The agency alleges that defendants were required to disclose and accrue for a loss contingency in three SEC filings in October 2012 because by that time, they had received a copy of the qui tam complaint filed under the FCA, and they had already acknowledged to DOJ that Tremco overcharged the government on several contracts by more than $11 million. Compl. ¶¶ 28, 30, 33, 35. Because none of the filings mentioned the DOJ investigation, the SEC claims that they were false and misleading. Compl. ¶¶ 37, 39-41.
On October 3, 2012, RPM filed its Form 8-K. Compl. ¶ 39. The SEC alleges that this document "purported to provide the company's financial results for its fiscal first quarter but misleadingly failed to disclose the material impact of the DOJ investigation on those results." Compl. ¶ 39.
On October 4, 2012, RPM filed its Form 10-Q. Compl. ¶ 40. The Form 10-Q included a section titled "Contingencies," which stated the following:
We are party to various claims and lawsuits arising in the normal course of business. Although we cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, we record provisions when we consider the liability probable and reasonably estimable. Our provisions are based on historical experience and legal advice, reviewed quarterly and adjusted according to developments. In general, our accruals, including our accruals for environmental, warranty, and tax liabilities, discussed further below, represent the best estimate of a range of possible losses. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments about potential actions by third parties, such as regulators, courts, and state and federal legislatures. Changes in the amounts of our loss provisions, which can be material, affect our Consolidated Statements of Income. While it is reasonably possible that excess liabilities, if they were to occur, could be material to operating results in any given quarter or year of their recognition, we do not believe that it is reasonably possible that excess liabilities would have a material adverse effect on our long-term results of operations, liquidity or consolidated financial position.
Form 10-Q, https://www.sec.gov/Archives/edgar/data/110621/000119312512415475/d408488d10q.htm; see also Compl. ¶¶ 40-41; Ex. P to Wagener Decl. [Dkt. # 30-17]; Decl. of Darren A. Laverne [Dkt. # 31-2] ("Laverne Decl."); Ex. 6 to Laverne Decl. [Dkt. # 31-8]. The SEC alleges that RPM omitted any information about the DOJ investigation, and that the omission made the discussion regarding contingencies misleading because a material loss was probable and reasonably estimable by October 4, 2012. Compl. ¶ 40.
The Form 10-Q also included a section titled "Controls and Procedures," which said:
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures ... have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Form 10-Q, https://www.sec.gov/Archives/edgar/data/110621/000119312512415475/d408488d10q.htm; Compl. ¶ 41. The SEC claims that this section was also false and misleading, particularly because "RPM later admitted in connection with its restatement [that] its disclosure controls and procedures were not effective at the end of the first quarter." Compl. ¶ 41.
On October 19, 2012, RPM filed a Prospectus Supplement with the SEC for a $300 million notes offering. Compl. ¶ 42. The Prospectus Supplement stated:
It is important for you to read and consider all information contained or incorporated by reference in this prospectus supplement... in making your investment decision.... We "incorporate by reference" into this prospectus supplement and the accompanying prospectus the information we file with the SEC.
Prospectus Supplement, https://www.sec.gov/Archives/edgar/data/110621/000119312512428759/d425482d424b5.htm; Compl. ¶ 42; see also Ex. S to Wagener Decl. [Dkt. # 30-20]; Ex. 16 to Laverne Decl. [Dkt. # 31-18]. Given its express incorporation of other allegedly incomplete SEC filings, the agency claims that the Prospectus Supplement was also materially false and misleading. Compl. ¶ 42.
January 2013 Filings
The complaint alleges that two SEC filings in January 2013 were also false and misleading because they did not disclose or accrue for the DOJ investigation. Compl.
¶¶ 54-59. The SEC claims that by early January 2013, RPM and Moore knew that RPM had already agreed to submit a settlement offer to DOJ by January 11, 2013, and that the settlement offer being prepared was for approximately $27-28 million. Compl. ¶¶ 49-50.
On January 8, 2013, RPM filed a Form 8-K, as well as a Form 10-Q for the fiscal second quarter. Compl. ¶ 54. Each filing contained statements identical to those in RPM's Forms 8-K and 10-Q in October 2012, and the SEC challenges the statements and omissions on the same grounds. Compl. ¶¶ 57-59; Ex. Q to Wagener Decl. [Dkt. # 30-18]; Ex. 10 to Laverne Decl. [Dkt. # 31-12].
April 2013 Filings
The SEC also alleges in the complaint that the Form 8-K and Form 10-Q filed on April 4, 2013, were false and misleading. Compl. ¶ 65.
The Form 8-K described the accrual related to the DOJ investigation:
As of February 28, 2013, based on discussions occurring on March 29, 2013, the Company recorded a $68.8 million accrual associated with an investigation of the Company's Building Solutions Group roofing contracts with the U.S. General Services Administration (the "GSA"). The substantial majority of the accrual relates to the sale of products and services from 2002 to 2008. The Company's Building Solutions Group is in ongoing settlement discussions with the U.S. Department of Justice (the "DOJ") and the GSA aimed at resolving the investigation. The Company is cooperating with the investigation, which involves compliance with certain pricing terms and conditions of GSA contracts under which the Company's Building Solutions Group roofing division sold products and services to the federal government. The actual amount of the Company's loss, which remains subject to approval by the DOJ, may vary from the amount of the accrual.
Form 8-K, https://www.sec.gov/Archives/edgar/data/110621/000119312513141254/d514555d8k. htm; see Ex. 11 to Laverne Decl. [Dkt. # 31-13].
The Form 10-Q contained the following statement regarding the investigation and accrual:
During the quarter ended February 28, 2012, we recorded a $68.8 million accrual associated with settlement discussions that we are currently having with the DOJ and the GSA Office of Inspector General aimed at resolving an existing investigation. We have cooperated, and continue to cooperate, with the investigation, which involves our compliance with certain pricing terms and conditions of our GSA Multiple Award Schedule contracts under which the roofing division of our Building Solutions Group sold products and services to the federal government. The accrual for this contingency represents our assessment of the amount of probable loss that may result from this matter. The substantial majority of the probable loss relates to the sale of products and services in the period from 2002 to 2008. In assessing our probable loss, we have considered the potentially disputed amounts under the relevant contracts, together with our understanding of policies for resolving such matters. The actual amount of our loss under the terms of any settlement may vary from the amount of the accrual.
Form 10-Q, https://www.sec.gov/Archives/edgar/data/110621/000119312513142237/d481669d10q.htm; see Ex. 12 to Laverne Decl. [Dkt. # 31-14].
Although these filings publicly disclosed the DOJ investigation and the related accrual for the first time, the SEC claims that both filings "misleadingly indicated that RPM had timely disclosed and accrued for the DOJ investigation," Compl. ¶ 65, when in fact "RPM incorrectly recorded the entire accrual as a charge against income in the third quarter of fiscal 2013, rather than recording appropriate portions of the accrual in the first and second quarters as required by [Generally Accepted Accounting Principles]." Pl.'s Opp. at 16.
July 24, 2013 Filing
The SEC states in the complaint that RPM's Form 10-K for the fiscal year 2013 suffered from the same defects as the other filings during fiscal year 2013, that is, that the Form 10-K "misleadingly indicated that RPM timely disclosed and accrued for the DOJ investigation in the third quarter," and "misleadingly stated that RPM's internal controls were effective." Compl. ¶ 69; see Ex. 13 to Laverne Decl. [Dkt. # 31-15].
December 5, 2013 Filing
Finally, the complaint also alleges that RPM filed a false and misleading Prospectus Supplement on December 5, 2013 in connection with a $200 million notes offering. Compl. ¶ 72. Because the Prospectus Supplement incorporated the Form 10-K filed on July 14, 2013, as well as all of RPM's other SEC filings, the SEC claims that it was also false and misleading. Compl. ¶ 72; see Ex. V to Wagener Decl. [Dkt. # 30-23].
RPM and Moore seek to dismiss the agency's Section 17(a)(2) claim for several reasons. They jointly contend that the agency's claim fails because defendants lacked a duty to disclose or accrue for the DOJ investigation. RPM also argues: (1) that the failure to disclose or accrue for the DOJ investigation was not material; (2) that any alleged misstatements were opinion statements, and the SEC did not allege that defendants knew that they were false; and (3) that the SEC has not alleged that the material misstatements or omissions occurred in the offer or sale of securities. And Moore maintains that the SEC has failed to allege that he obtained money or property by means of an untrue statement or material omission.
A. The SEC has sufficiently alleged that defendants had a duty to disclose and accrue for the DOJ investigation prior to the April 2013 filings.
1. Legal Standard for a Duty to Disclose
Section 17(a)(2) provides that "[i]t shall be unlawful for any person in the offer or sale of any securities ... to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading." 15 U.S.C. § 77q(a)(2). Defendants contend that the Section 17(a)(2) claim based on omissions fails because they lacked a duty to disclose the allegedly omitted information. RPM Mem. at 20-21; Moore Mem. at 17-19.
Although it does not appear that the D.C. Circuit has directly addressed the issue of omissions in the context of Section 17(a), courts in this district have interpreted Section 17(a) based on the principles applied in Section 10(b) and Rule 10b-5 cases because the language of Rule 10b-5, promulgated pursuant to Section 10(b), is extremely similar to the language in Section 17(a). See, e.g., United States v. Crop Growers Corp. , 954 F.Supp. 335, 349-50 (D.D.C. 1997) ; see also 15 U.S.C. § 78j(b) ; 17 C.F.R. § 240.10b-5.
The Supreme Court has held in the context of Section 10(b) of the Securities Exchange Act that "[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella v. United States , 445 U.S. 222, 228, 235, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980) ("But one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so"). The D.C. Circuit has interpreted Chiarella to mean that a duty to disclose under Section 10(b) attaches "only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws." Dirks v. SEC , 681 F.2d 824, 837 (D.C. Cir. 1982), rev'd on other grounds , 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983).
Further, a party has a duty to disclose material information not only when required by a specific rule or regulation but "when silence would make other statements misleading or false." SEC v. Brown , 740 F.Supp.2d 148, 160 (D.D.C. 2010), quoting In re XM Satellite Radio Holdings Sec. Litig. , 479 F.Supp.2d 165, 178 (D.D.C. 2007). In this second scenario, "[t]he touchstone of the inquiry is ... whether defendants' representations or omissions, considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor." Id. , quoting In re XM Satellite Radio , 479 F.Supp.2d at 178.
Therefore, whether defendants can be held liable for failing to disclose information in their submissions to the SEC turns on whether they had a duty to do so-either because a duty was expressly imposed by rule or statute, or in order to make other statements not misleading. The Court finds that the SEC has alleged sufficient facts to show that defendants had a duty to disclose the DOJ investigation pursuant to accounting standards.
2. Obligation to Disclose or Accrue for the DOJ Investigation Under ASC 450
The SEC points to Generally Accepted Accounting Principles ("GAAP"), in particular, Accounting Standards Codification 450 ("ASC 450"), as a source of the duty to disclose. Compl. ¶ 23; see Pl.'s Opp. at 14-27. The agency argues that from at least March 2011 through April 2013, the DOJ investigation represented a loss contingency that should have been accrued for, or at least disclosed. Pl.'s Opp. at 21-27. Defendants maintain that they had no obligation to do either under ASC 450. RPM Mem. at 21-24; Moore Mem. at 18-22, 26.
Financial statements included with an issuer's SEC filings must comply with GAAP, and financial statements filed with the SEC that are not prepared in accordance with GAAP are presumed to be misleading. Ind. Pub. Ret. Sys. v. SAIC, Inc. , 818 F.3d 85, 93 (2d Cir. 2016) ; 17 C.F.R. § 210.4-01. The SEC relies on ASC 450, which provides accounting guidance for the accrual and disclosure of a loss contingency, which is defined as "an existing condition, situation or set of circumstances involving uncertainty as to a possible loss that will be resolved when one or more future events occurs or fails to occur." Compl. ¶ 23; see also Ex. C. to Wagener Decl. [Dkt. # 30-4] ("ASC") at 450-10-20. Loss contingencies can include actual or possible claims, as well as pending or threatened litigation. Compl. ¶ 23; see also ASC at 450-20-05-10. The SEC contends that the DOJ investigation was a loss contingency that needed to be disclosed because it was reasonably possible that RPM would suffer a loss, and that it needed to be accrued for because the information available to RPM and Moore suggested that a loss was probable and it could be reasonably estimated. See Pl.'s Opp. at 21-27.
The applicable accounting standards set out different rules for claims that have been asserted and those that have yet to be asserted. Pursuant to ASC 450-20-50, for a claim that has been asserted, an issuer must disclose a loss contingency if there is "at least a reasonable possibility" that a loss may be incurred, even if the amount cannot be reasonably estimated. ASC at 450-20-50-2; id. at 450-20-50-3; id. at 450-20-50-5; see also Compl. ¶ 23. A loss contingency is reasonably possible if the likelihood that it will occur "is more than remote but less than likely." ASC at 450-20-20.
With respect to claims that have not yet been asserted, disclosure is not required "if there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment" unless: (1) "[i]t is considered probable that a claim will be asserted," and (2) "[t]here is a reasonable possibility that the outcome will be unfavorable." ASC at 450-20-50-6.
Also, ASC 450 provides with respect to an "unasserted claim" that the entity must consider the probability of the assertion of claims and the possibility of loss to determine if the investigation must be disclosed. ASC at 450-20-55-14. If assertion of a claim "is not probable, no accrual or disclosure would be required." Id. at 450-20-55-15. But if assertion of a claim is probable, then disclosure would be "required in either of the following circumstances: (a) [a]n unfavorable outcome is probable but the amount of loss cannot be reasonably estimated; [or] (b) [a]n unfavorable outcome is reasonably possible but not probable." Id. And "[i]f an unfavorable outcome is probable and the amount of loss can be reasonably estimated, accrual of a loss is required." Id. at 450-20-55-14.
To determine the probability of an unfavorable outcome in any litigation, claim, or assessment, ASC 450 lists a number of factors the company may consider, including: (1) the nature of the litigation, claim, or assessment; (2) the progress of the case; (3) the opinions of legal counsel or other advisors; (4) the experience of the entity in similar cases; (5) the experience of other entities; and (6) "any decision of the entity's management as to how the entity intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement)." ASC at 450-20-55-12.
ASC 450 requires that an issuer record an accrual for a loss contingency as a charge against income if an unfavorable outcome is determined to be probable, and the amount of loss can be reasonably estimated. ASC at 450-20-25-2; id. at 450-20-55-13; id. at 450-20-55-16. However, the "filing of a suit or formal assertion of a claim or assessment does not automatically indicate that accrual of a loss may be appropriate." Id. at 450-20-55-13.
a. The SEC has alleged that defendants had a duty to disclose and accrue for the DOJ investigation in RPM's October 2012 filings.
Given the two sets of standards, it is necessary to determine at the outset whether the investigation in question was an "asserted" or an "unasserted" claim under ASC 450 to identify the elements required to state a claim that defendants breached a duty to disclose.
RPM and Moore knew of the existence of the whistleblower qui tam complaint by at least August 9, 2012. Compl. ¶ 28. Moore contends that the claim was "unasserted" in the October 2012 time frame because the government had not yet given any indication whether it intended to intervene in the qui tam action and assert a claim against RPM. Moore Mem. at 18-22. Since the government claim was "unasserted," Moore argues that ASC 450-20-50-6 required the SEC to allege that it was probable that a claim would be asserted, and that there was a reasonable possibility that an outcome of an asserted claim would be unfavorable, and that in the absence of those allegations, the complaint does not allege the existence of a duty to disclose. Id.
The SEC takes the position that a claim had indeed been asserted against RPM since a private qui tam complaint alleging a violation of the FCA had been filed against RPM in federal court. Pl.'s Opp. at 23. Moreover, it argues that even if the original complaint did not qualify as an "asserted" claim because the United States had not yet intervened, the higher probability standard for an "unasserted" claim would not apply because DOJ had at least "manifested ... an awareness of a possible claim," which would preclude the application of ASC 450-20-50-6. Id. , quoting ASC 450-20-50-6. Thus, to state a claim that disclosure was required, all the SEC had to allege was that there was a "reasonable possibility" that a loss could occur. See Pl.'s Opp. at 23; ASC 450 450-20-50-2; id. at 450-20-50-3; id at 450-20-50-6. The Court agrees.
First, the SEC has plausibly alleged that a claim had already been asserted against RPM. Paragraph 17 of the complaint states that the qui tam action was filed in July 2010, and paragraphs 18, 19, 20, 21, 22, and 28 allege that RPM and Moore were aware of the complaint and knew that DOJ was actively engaged in an investigation to decide whether to intervene in it. Compl. ¶¶ 17-22, 28. And, even if a claim on the part of the United States was as yet "unasserted," the ASC 450 guidelines surrounding disclosure would apply because DOJ had certainly "manifested" an "awareness of a possible claim" by issuing subpoenas and engaging in communications with RPM and RPM's counsel related to the amount of the overpayments. See, e.g. , Compl. ¶¶ 18, 30, 33, 48, 51.
ASC 450 does not provide any guidance as to what it means to "manifest" an "awareness of a possible claim." Moore heavily relies on In re Lions Gate Entertainment Corp. Securities Litigation , 165 F.Supp.3d 1 (S.D.N.Y. 2016) for the proposition that a government agency cannot be said to have "manifested awareness" of a claim simply because it is investigating a potential violation of law. Moore Mem. at 21. In that case, the complaint alleged that defendants were aware of an active SEC investigation into allegedly false statements and omissions made in connection with certain corporate transactions, and that the company ultimately settled with the SEC prior to the filing of any enforcement action. In re Lions Gate , 165 F.Supp.3d at 1. The court granted the company's motion to dismiss, holding that a "government investigation, without more, does not trigger a generalized duty to disclose," id. at 12, and that the company did not have a duty to disclose or accrue under ASC 450 because the investigation itself did not qualify as "pending or threatened litigation," and there was no way the loss could have been estimated because the settlement amount was not revealed until the company accrued an expense for the possible settlement. Id. at 15, 21-22.
In re Lions Gate is not binding on the Court, and in any event, it is easily distinguishable since RPM and Moore had knowledge of more than just the mere existence of an open investigation; they knew that a federal civil complaint alleging violations of the False Claims Act was actually pending, and that DOJ was in the midst of determining whether it was going to intervene and take over the case. And the SEC's complaint here alleges that by September of 2012 at the latest, RPM, through its outside counsel, was engaged in quantifying the scope of the overcharge to the government, which, under the FCA, could be trebled.
For those reasons, this case is more similar to Indiana Public Retirement System v. SAIC, Inc. , 818 F.3d 85 (2d Cir. 2016). In that case, the defendant provided various services to government agencies, and it became the prime contractor on a project with New York City to develop an automated timekeeping program known as CityTime. Id. at 89. The defendant became involved in an elaborate kickback scheme, which required workers to inflate billable hours and hourly rates, and ultimately the city began evaluating whether it would seek recovery of its payments to the defendant in connection with the project. Id. But the defendant did not disclose its potential liability related to the CityTime project in its Form 10-K. Id. The court held that the plaintiff had adequately alleged that the defendant violated Financial Accounting Standard No. 5 ("FAS 5"), the precursor to ASC 50, by failing to disclose a loss contingency in its Form 10-K filing arising from the city's "manifest awareness" of a possible claim against the defendant. Id. at 93-94. Further, the court concluded that the "reasonable possibility" standard of FAS 5 applied since the "[c]ity had manifested an awareness of a possible, sizeable claim against" the defendant where, among other things, the city had already filed a criminal fraud complaint against company principals that "alluded to" the company's improper conduct. Id.
Therefore, applying ASC 450, to state a claim that defendants had an obligation to disclose the DOJ investigation, the SEC must have alleged that there was a "reasonable possibility" that a loss could occur. And it has done so. According to the complaint, defendants "knew or should have known" that it was "reasonably possible ... that RPM would incur a material loss in connection with the DOJ investigation," based on the fact that they knew about the qui tam action, the company had already estimated that Tremco overcharged the government by at least $11.4 million, and RPM's counsel had been in communication with the DOJ about this figure. Compl. ¶¶ 28, 30-31, 33, 37. These facts give rise to the plausible allegation that it was "reasonably possible" at the time of the October 2012 filings that RPM could have suffered a loss.
RPM contends that it did not have an obligation to disclose or accrue for the DOJ investigation under ASC 450 because the guidelines do not require the disclosure of contemplated or exchanged settlement offers. RPM Mem. at 22-23. But this argument is beside the point. Nowhere in SEC's complaint does it allege that RPM's filings were false and misleading because the company did not disclose its actual settlement offer or settlement discussions with DOJ. Rather, Claim 1 alleges that RPM had a duty to disclose the DOJ investigation as a loss contingency based on the information it knew prior to April 2013. And one piece of that puzzle was the contemplated settlement offer, which ASC 450 recognizes as one factor a company may consider in determining if disclosure or accrual is necessary. See ASC at 450-20-55-12; id. at 450-22-55-18; id. at 45-22-55-36; Pl.'s Opp. at 20.
Turning to whether accrual was necessary, Moore maintains that the company had no duty to accrue a loss in the October 2012 filings because a loss was not "probable" at this time since the government had not indicated if it planned to intervene in the qui tam action. Moore Mem. at 18-19. Further, he argues that the SEC does not allege, as he insists it must, that Moore knew then that RPM was likely either to settle or lose at trial. Id. at 19. But the SEC's allegations are sufficient at this stage to survive a motion to dismiss. The SEC claims that defendants "knew or should have known" that it was "probable and reasonably estimable [ ] that RPM would incur a material loss in connection with the DOJ investigation," because they were aware of the qui tam complaint, had already calculated $11.4 million worth of liability to the government, and had begun discussing settlement options with DOJ. Compl. ¶¶ 28, 30 31, 33, 37. This information supports a plausible inference that it was probable that a loss would occur, and that the loss could be reasonably estimated to be at least $11 million. Therefore, the SEC has adequately alleged that defendants violated ASC 450 by failing to disclose and accrue for a loss contingency in RPM's three October 2012 filings.
b. The SEC has alleged that defendants had a duty to disclose and accrue for the DOJ investigation in RPM's January 2013 filings.
Given the additional facts that had come to light by the time RPM made its filings on January 8, 2013, the Court also finds that the SEC has sufficiently alleged that defendants had a duty to disclose and accrue for the DOJ investigation in the January 2013 filings, and therefore adequately alleged that defendants violated ASC 450 at that time as well.
Building on the facts alleged in connection with the October 2012 filings, the complaint goes on to allege that RPM learned in November 2012 that DOJ expected any settlement offer to be reached by mid-January, and that by mid-December 2012, RPM told DOJ that it would submit a settlement offer by January 11, 2013. Compl. ¶¶ 46, 49. Further, on December 21, 2012, RPM representatives, including Moore, discussed the components of the planned settlement offer, which they had calculated at $27-28 million. Id. ¶ 50. RPM ultimately submitted a 44-page settlement proposal to the DOJ for $28.3 million on January 11, 2013. Id. ¶ 62.
Based on these additional facts and the allegations of what transpired before October 2012, the SEC has alleged that as of January 8, 2013, it was reasonably possible that a loss would occur and that therefore RPM was obligated to disclose the DOJ investigation. And, it has sufficiently alleged that as of that date, the loss was probable, since RPM was in the process of preparing a settlement agreement involving a more than $20 million payment, and it had already promised to deliver it to DOJ by January 11, 2013. These facts, coupled with the fact that RPM delivered a lengthy settlement proposal to DOJ three days after the filings, give rise to a plausible inference that by January 8, RPM and Moore knew that it was probable that it would settle with DOJ and suffer a loss. Further, the loss could be reasonably estimated since RPM had estimated its potential liability at $28.3 million and included that term in its settlement offer. Therefore, the agency has adequately alleged that defendants violated ASC 450 by failing to disclose and accrue for the loss contingency in its January 8, 2013 filings.
B. The SEC has sufficiently alleged that the misstatements or omissions were material.
Defendants can only be liable for a violation of Section 17(a)(2) if they made misrepresentations or omissions that were material. 15 U.S.C. § 77q(a)(2). The Court concludes that the SEC has sufficiently alleged that the misstatements or omissions were material.
A statement or omission is material under the federal securities laws if there is "a substantial likelihood that a reasonable shareholder [or investor] would consider [the information] important." TSC Indus. v. Northway, Inc. , 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) ; Basic, Inc. v. Levinson , 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (adopting TSC Industries standard for materiality to Section 10(b) and Rule 10b-5 claims); SEC v. Steadman , 967 F.2d 636, 643 (D.C. Cir. 1992). "Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." TSC Indus. , 426 U.S. at 449, 96 S.Ct. 2126. "[T]he materiality of a misrepresentation or omission must be assessed as of the time of the contested transaction." Media Gen., Inc. v. Tomlin , 387 F.3d 865, 869 (D.C. Cir. 2004). The question of whether alleged misrepresentations or omissions are material is a mixed question of law and fact. Id.
Because materiality is a mixed question of law and fact, courts have cautioned against granting a motion to dismiss based on the failure to plead materiality "unless [the information is] so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Litwin v. Blackstone Grp., L.P. , 634 F.3d 706, 71