MONTPELIER, Vt. – The U.S. Department of Labor is suing the fiduciaries of a Vermont employee stock ownership plan for violations of the Employee Retirement Income Security Act alleging that First Bankers Trust Services, Inc.’s 2011 purchase of the company on behalf of the ESOP from its two previous owners caused the plan to suffer sizable financial losses.
Named in the suit are Sonnax Industries, Inc., a Bellows Falls 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, headquartered in Quincy, Illinois. 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.
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 department intends to make certain 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.
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 department’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. It further alleges First Bankers:
- Failed to protect the ESOP in connection with the plan’s purchase of Sonnax stock from Harmon and Fritz.
- Relied on a flawed valuation of the stock.
- Did not prudently investigate the transaction’s merits.
- Purchased highly leveraged Sonnax stock for far more than fair market value, with the aid and knowledge of Sonnax, Harmon and Fritz.
Sonnax, Harmon and Fritz knew that First Bankers’ work was flawed yet failed to ensure that First Bankers fulfilled its fiduciary duties. They also failed to prevent the ESOP’s purchase at what they knew or should have known was an inflated price, and participated knowingly in First Bankers’ fiduciary breaches and otherwise failed to comply with their own fiduciary duties.
“The department alleges that the defendants breached their fiduciary responsibilities to act solely in the interest of the plan and its participants with care, skill, prudence and diligence, and solely in accordance with the plan’s documents as required by law. Instead, they placed their own interest above those of the plan’s participants who put their trust in the plan, its trustee and other fiduciaries,” said Susan Hensley, EBSA’s regional director in Boston.
“The alleged actions taken by the defendants improperly disadvantaged the ESOP and its participants. We’ve filed this suit so that the losses are restored to the plan and other corrective action will be taken for the benefit of the participants,” said Michael Felsen, the department’s regional solicitor in New England.
The lawsuit asks the court to:
- Order the defendants to restore to the ESOP all losses incurred as a result of their fiduciary breaches, prohibited transactions and other violations for which they are liable plus appropriate lost earnings.
- Require them to disgorge any and all plan assets obtained by them as well as any and all profits earned by them from those assets.
- Enjoin them from serving as fiduciaries, trustees or service providers for any ERISA-covered plan.
- Enjoin them from future ERISA violations.
- Enjoin First Bankers Trust Services from receiving any benefits from its indemnification agreements with Sonnax that violate ERISA.
The EBSA’s Boston Regional Office investigated the case, and senior trial attorneys Nathan P. Goldstein and Gail E. Glick and trial attorney Niamh E. Doherty in the department’s Regional Office of the Solicitor in Boston are litigating. Workers, retirees and employers may contact EBSA toll free at 866-444-3272 to speak with a benefits advisor, or through https://www.dol.gov/agencies/ebsa/about-ebsa/ask-a-question/ask-ebsa.
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Perez v. First Bankers Trust Services, Inc., Tommy A. Harmon, Frederick Fritz, Sonnax Industries, Inc. and the Sonnax Industries, Inc. Employee Stock Ownership Plan.
Civil Action Number: 5:16-cv-00328-gwc