NEW YORK – A federal judge, presiding over a U.S. Department of Labor lawsuit, has found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an employee stock ownership plan sponsored by a New Jersey paving and building site preparation company when it caused the plan to overpay $9.4 million for shares of the company’s stock.
SJP Group Inc., the plan’s sponsor, hired First Bankers as an independent fiduciary to advise the company’s plan on whether – and at what price – to purchase shares of SJP Inc. from its majority shareholder and officer, Vincent DiPano.
An investigation by the department’s Employee Benefits Security Administration found violations of the Employee Retirement Income Security Act and, on July 17, 2012, the department filed suit against both First Bankers and DiPano in the U.S. District Court for the District of New Jersey seeking to recover losses suffered by the plan participants.
Following a 17-day trial, the court held that First Bankers breached its fiduciary duties to the plan’s participants by failing to conduct a prudent investigation into the fair market value of the shares. As a result, First Bankers approved the participants’ purchase of 38 percent of the outstanding stock of SJP Group from DiPano for $16 million, which was nearly $10 million more than what the stock was worth.
The court also held that First Bankers:
- Failed to independently and thoroughly investigate the true value of the shares. As the plan’s fiduciary, it was responsible for ensuring that the participants paid no more than fair market value for the shares.
- Relied on unrealistically optimistic projections of SJP’s future earnings.
An employee stock ownership plan is a retirement plan permitted to invest some, or all of its assets in employer stock. Plans are often sponsored by small or mid-sized closely held firms that are not traded on any public exchange or capital market, so there is no way of knowing if the price paid for a share of stock is, in fact, fair market value without careful and precise review of the company’s financials and projected earnings.
“Participants’ retirement benefits depend on the plan buying and selling stock for fair market value, the department intends to make certain that the price a plan pays for the plan sponsor’s stock reflects its true market value,” said Jonathan Kay, EBSA’s regional director in New York. “Those retained to advise a plan about the stock purchase must fulfill their fiduciary duties under ERISA and prevent those who sell their shares to a plan from receiving an unwarranted windfall.”
“This decision upholds our findings that First Bankers violated its fiduciary duties of prudence and loyalty to the plan and its participants when it caused the SJP Group plan to overpay for the shares,” said Jeffrey S. Rogoff, regional solicitor of labor in New York. “It also serves notice to plan fiduciaries that their sole obligation is to protect the interest of the plan participants regardless of the impact on the selling shareholders and the fiduciary.”
In a 2016 consent order, the department resolved its allegations that DiPano violated his fiduciary duty by failing to monitor First Bankers adequately. DiPano agreed to pay $2.25 million in restitution and a penalty.
EBSA’s New York Regional Office conducted the original investigation. Attorneys Andrew Karonis and Andrew Katz of the department’s Regional Office of the Solicitor in New York litigated the case for EBSA. The opinion and order for this case can be viewed here and here.
The department is currently in litigation with First Bankers in three other matters, in which the department similarly alleges that First Bankers failed to prudently determine the proper value of plan shares resulting in substantial losses to plans and their participants. The matters are all filed under the name of Secretary vs. First Bankers Trust Services, Inc. et al. The matters involve the Rembar Company, Inc. plan (Southern District of New York, Civil Action File No. 12-8649), the Maran, Inc. plan (Southern District of New York, Civil Action File No. 12-8648), and the Sonnax Industries, Inc. plan (District of Vermont, Civil Action File No. 16-328).
Employers and workers can reach EBSA’s New York office at 212-607-8600 or toll-free at 866-444-3272 for help with problems or questions related to private sector retirement and health plans. Additional information can be found at www.dol.gov/ebsa/.
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Secretary of Labor v. First Bankers Trust Services, et. al.
Civil Action Number: 12-4450 (MAS) (DEA)