United States District Court, District of Columbia
BERMAN JACKSON, United States District Judge
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 tarn 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.
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
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.
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
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.
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 tarn
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.
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. ¶ 21.
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.
First Quarter Fiscal Year 2013 (June-August 2012)
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.
August 9, 2012, DOJ provided RPM with a copy of the qui
tarn 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.
Second Quarter Fiscal Year 2013 (September-November
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.
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.
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.
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.
Third Quarter Fiscal Year 2013 (December 2012-February
November 5, 2012, DOJ notified RPM that the seal on the
qui tarn 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.
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. ¶
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.
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 tarn 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.
The Settlement and RPM's Third Quarter and Fiscal Year
January 11, 2013, RPM submitted a settlement proposal to DOJ,
offering to settle the investigation and underlying qui
tarn 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 tarn complaint remained under
seal. Id. ¶ 66.
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.
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.
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 tarn complaint for
approximately $61 million. Id. ¶¶ 2, 71.
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.
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 DO
J 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.
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.
RPM's Financial Restatements
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
'[disclosure 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.
August 14, 2014, RPM filed a Form 8-K, which admitted that
RPM made "errors" in disclosing and accruing for
the DO J 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.
The SEC's Complaint
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. ¶¶
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-l, 13a-ll,
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.
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-l. (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.
OF REVIEW I.Rule 12(b)(6) Standard
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 (2009), quoting BellAtl. Corp. v. Twombly, 550
U.S. 544, 570 (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.
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, citing Twombly, 550 U.S. at
556. "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. 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, 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.
considering a motion to dismiss under Rule 12(b)(6), the
Court is bound to construe a complaint liberally in the
plaintiffs 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.
Rule 9(b) Standard
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).
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. Sees. 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. UJBFin.
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. Sees. 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 §
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. Sees.
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
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, No. 15-cv-7116, 2017 WL 1157140, at *8
(S.D.N.Y. March 27, 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).
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
The SEC has stated a claim against RPM and Moore under
Section 17(a)(2) of the Securities Act in
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.
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 (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).
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.
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 tarn 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,
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.
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.
10q.htm; see also Compl. ¶¶ 40-41; Ex. P
to Wagener Decl. [Dkt. # 30-17]; Decl. of Darren A.
[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 ...