The U.S. Department of Labor (DOL) is suing the fiduciaries of a Vermont employee stock ownership plan (ESOP) for violations of the Employee Retirement Income Security Act (ERISA), alleging that First Bankers Trust Services, Inc.’s 2011 purchase of a company on behalf of the ESOP from its two previous owners caused the plan to suffer sizable financial losses.
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An ESOP is a type of retirement plan that is permitted to invest some or all of its assets in employer stock. Participants’ benefits depend on the ESOP buying and selling stock for fair market value, so the DOL seeks to insure that:
- The price an ESOP pays for the stock reflects its true market value.
- Those retained to advise an ESOP about the stock purchase fulfill their fiduciary duties under ERISA.
- Those who sell their shares to an ESOP do not receive a windfall.
Named in the suit are Sonnax Industries, Inc., a supplier of automotive drivetrain products; Tommy Harmon, its president and chief executive officer; Frederick Fritz, a board member with substantial company control; and First Bankers.
Sonnax, Harmon, and Fritz hired First Bankers in 2010 as an independent fiduciary to advise the ESOP on whether, and at what price, to purchase shares of Sonnax from Harmon and Fritz. All defendants are fiduciaries of and parties in interest to the ESOP.
On Jan. 3, 2011, the company purchased all of Harmon’s and Fritz’s stock shares for $48.8 million and issued new shares simultaneously which were sold to the ESOP for $10 million. The DOL’s Employee Benefits Security Administration investigated and found that First Bankers’ valuation that justified the sales was flawed and its representation of the ESOP during negotiations deficient, resulting in a significant inflation of the purchase price.
In its suit, the department alleges that the defendants violated ERISA’s prohibited transaction and fiduciary duty provisions.