Last week RPM International (RPM) disclosed it is under investigation by the SEC. This was not news to us. We have been tracking undisclosed SEC investigative activity on the company dating back to Aug-2012. We review the pertinent facts, our research history, and give our take on why a disclosure now could be more dangerous than investors may realize.
Facts of Interest or Concern:
In an earnings press release last week, RPM International said in part,
“RPM was notified by the Securities and Exchange Commission on June 24, 2014, that it is the subject of a formal investigation pertaining to the timing of its disclosure and accrual of loss reserves with respect to the previously disclosed fiscal 2013 GSA and Department of Justice investigation into compliance issues relating to Tremco roofing division's GSA contracts.”
Though the company says it was notified on 24-Jun-2014, our research history suggests this SEC investigation has a long tail to it, dating back potentially as far as 2012.
Since Aug-2012, the SEC has been blocking our access to records on RPM over concern their release could interfere with law enforcement proceedings. We received the same denial in Jul-2013 and again in Jan-2014. As a matter of law, the SEC was acknowledging some sort of investigative activity.
In May-2014 we published a research note indicating the SEC had confirmed an active-and-ongoing investigation involving RPM. At that time our research showed no signs of disclosure of SEC investigative activity for the prior two years.
With the shares up 2.4% on the day of the earnings release (versus an S&P 500 that was essentially flat), it appears investors are ignoring the SEC aspect of earnings release. We think that is misplaced. Here’s why --
- Don’t get distracted by the company saying it was notified by the SEC on 24-Jun that it was subject of a formal investigation. That doesn’t mean it started then. Again, the results of our works suggests RPM sat on this SEC investigation for at least the past two years, perhaps longer. In our experience, it's bad when a company waits a long time to disclose an SEC probe. It begs the critical question, “What changed to prompt the disclosure?”
- Public companies are generally not required to disclose the existence of SEC probes. They are only required to disclose matters deemed material. That management now disclosed means they likely now view it as material. Why? We say ignore the implications of this at your own peril.
- That the investigation is now formal could signal an escalation and/or that the company is not quite cooperating the way the SEC would like.
- In formal SEC investigations, subpoenas are frequently involved. Good questions to ask the company is were they subpoenaed, to whom they were sent, and what the subpoenas sought.
Note: New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.
The Probes Reporter™ Watch List tracks those companies involved in undisclosed SEC investigative activity. Names are added to and removed from this list frequently based on responses we received to Freedom of Information Act (FOIA) requests we file with the SEC. This is our latest update.