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RPM: Acquisition, SEC Investigation

Tuesday, September 13, 2016

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Known as a multinational holding company with subsidiaries that manufacture and market high-performance coatings, sealants and specialty chemicals, RPM International is extending its reach in the oil and gas energy market with the acquisition of a Canadian manufacturer that describes itself as a leader in polymer protection.

At the same time, the Medina, OH-based firm faces allegations of accounting fraud levied by the federal agency responsible for protecting investors against fraudulent and manipulative practices in the market and enforcing federal securities laws.

Pipeline Coatings Purchase

RPM announced its proposed acquisition of Specialty Polymer Coatings Inc. (SPC) Monday (Sept. 12).

Terms of the transaction, which is expected to be accretive to earnings within one year, were not disclosed.

RPM pipe coating
RPM International

RPM International announced its proposed acquisition of Canadian pipeline coatings company Specialty Polymer Coatings Inc., which is expected to help extend its reach in the oil and gas energy market. 

Sited in Langley, British Columbia, SPC manufactures high-performance coatings for the global oil and gas pipeline market with annual net sales of approximately $26 million.

The SPC product line is predominantly 100 percent solids epoxy and urethane coatings that contain no volatile organic compounds, according to the announcement. They are specified and sold for the maintenance and construction of steel pipes, railway cars, tank linings, steel structures and marine applications.

"We already have a strong position in the U.S. oil and gas energy market through our Carboline business. The acquisition of SPC complements that position by providing a proven, tenured technology with strong brand recognition for the pipeline industry,” said Frank C. Sullivan, RPM chairman and CEO.

“We intend to accelerate SPC's growth by leveraging Carboline's large global sales force," he added.

SPC will operate as a freestanding business within the RPM Performance Coatings Group and report through the Carboline Company. Several members of the current senior leadership under SPC founder Bob Alliston will continue to manage the business as part of RPM, Sullivan noted.

In addition to its headquarters outside Vancouver, SPC also has a manufacturing facility in Brantford, Ontario, and an office and warehouse in Angleton, TX.

SEC Enforcement Action

On Friday (Sept. 9), the Securities and Exchange Commission charged RPM International Inc. and its general counsel, Edward W. Moore, 59, with disclosure and accounting failures.

According to the agency’s statement, RPM and Moore “failed to disclose a material loss contingency, or record an accrual for, a government investigation when required to do so under governing accounting principles and securities laws.”

SEC logo
By U.S. Government / via Wikimedia Commons

The U.S. Securities and Exchange Commission announced it had lodged a disclosure and accounting fraud case against RPM International for failing to disclose a loss contingency or record an accrual for an investigation by the Department of Justice.

The SEC’s complaint indicates that, from 2011 through 2013, RPM and its subsidiary Tremco Inc.—a manufacturer of roofing materials, construction sealants and waterproofing systems—were under investigation by the U.S. Department of Justice for overcharging the government on certain contracts.

As RPM's general counsel and chief compliance officer, Moore allegedly oversaw RPM's response to the DOJ investigation. However, Moore did not inform RPM's CEO, CFO, Audit Committee, and independent auditors, of material facts about the investigation, the complaint alleges.

For example, Moore reportedly knew but failed to inform them that:

  • RPM sent DOJ estimates showing RPM's subsidiary overcharged the government on the contracts under investigation by a material amount;
  • RPM agreed to submit a settlement offer by a specific date to resolve the DOJ investigation; and,
  • Prior to submitting the settlement offer to DOJ, RPM's overcharge estimates increased substantially to at least $28 million.

The SEC alleges that RPM filed multiple false and misleading documents with the SEC because of Moore’s actions. For example, RPM allegedly failed to disclose in its SEC filings:

  • Any loss contingency related to the DOJ investigation, or to record an accrual on its books, when required to do so by governing accounting principles and the securities laws, and  
  • A material weakness in its internal control over financial reporting and its disclosure controls when in fact such weakness existed.

“Because of RPM’s false and misleading SEC filings, investors were not timely informed that a material loss relating to the DOJ investigation was reasonably possible or probable,” the complaint states. “Investors also were not timely notified of a material weakness in RPM’s internal control over financial reporting and its disclosure controls.”

In August 2014, RPM did restate its financial results for three quarters that occurred during the DOJ investigation and filed amended SEC filings for those quarters, disclosing the DOJ investigation and related accruals, the commission said in its announcement. In the restated filings, RPM also disclosed errors relating to the timing of its disclosure and accrual for the DOJ investigation.

RPM Tremco AlphaGuard
RPM International

The DOJ investigation in question occurred between 2011 through 2013, when RPM and one of its subsidiaries—roofing materials, construction sealants and waterproofing systems company Tremco Inc.—were under scrutiny for overcharging the government on certain contracts.

“RPM’s restatement thus confirmed that the company’s original SEC filings referenced above were materially false and misleading,” the complaint notes.

The SEC's complaint charges RPM with violating specific antifraud provisions of the federal securities laws of the Securities Act of 1933; reporting provisions of the federal securities laws of the Securities Exchange Act of 1934 and rules thereunder; and the books and records and internal controls provisions of the federal securities laws of the Exchange Act.

The complaint also charges Moore with violating certain sections of the Securities Act and rules under the Exchange Act. The complaint seeks permanent injunctions, repayment of “ill-gotten gains” plus interest and penalties.

In response to the enforcement action, RPM issued a statement Friday (Sept. 9) asserting that “the restatements had no impact on the audited results for the fiscal year ended May 31, 2013, and the company's audit committee concluded that there was no intentional misconduct on the part of any of its officers.”

Sullivan added: "We believe the allegations have absolutely no merit and are the product of prosecutorial overreach. We intend to vigorously defend ourselves and expect our position to be vindicated in court."

The SEC has demanded a jury trial.

About the Company

RPM International Inc. owns subsidiaries that are world leaders in specialty coatings, sealants, building materials and related services across three segments.

RPM's industrial products include roofing systems, sealants, corrosion control coatings, flooring coatings and other construction chemicals. Industrial companies include Stonhard, Tremco, illbruck, Carboline, Flowcrete, RPM Belgium and Euclid Chemical.

RPM's consumer products are used by professionals and do-it-yourselfers for home maintenance and improvement and by hobbyists. Consumer brands include Rust-Oleum, DAP, Zinsser, Varathane and Testors.

RPM's specialty products include industrial cleaners, colorants, exterior finishes, specialty OEM coatings, edible coatings, restoration services equipment and specialty glazes for the pharmaceutical and food industries. Specialty segment companies include Day-Glo, Dryvit, RPM Wood Finishes, Mantrose-Haeuser, Legend Brands, Kop-Coat and TCI.

   

Tagged categories: Acquisitions; Asia Pacific; Carboline; Coating Materials; EMEA (Europe, Middle East and Africa); Finance; Latin America; North America; Oil and Gas; Pipeline; RPM; Tremco; Violations

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