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Securities and Exchange Commission v. RPM International, Inc.

United States District Court, District of Columbia

September 29, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
RPM INTERNATIONAL, INC., et al, Defendants.

          MEMORANDUM OPINION

          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 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.

         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 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. ¶ 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. ¶ 21.

         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 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].[1]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").[2] 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 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.

         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.[3] 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 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.

         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 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.

         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 tarn 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 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.

         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 '[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.

         On 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.[4] 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-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. ¶¶ 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-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. ¶¶ 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 (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.

         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, 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.

         When 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. 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. 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 § 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. 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 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, 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).

         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.[5]

         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.

15U.S.C. §77q(a)(2).

         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 (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 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, 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/d408488d 10q.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 ...


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