Corrected: Court Requires Fiduciaries to Pay $2,225,000 to Vermont ESOP Plus Civil Penalties Following U.S. Department of Labor Investigation and Litigation
MONTPELIER, VT – After a U.S. Department of Labor Employee Benefits Security Administration investigation, the U.S. District Court for the District of Vermont has entered a consent judgment requiring the fiduciaries of the Sonnax Industries’ employee stock ownership plan (ESOP) to pay $2,225,000 to the plan. The judgment resolves alleged violations of the Employee Retirement Income Security Act stemming from the ESOP’s 2011 purchase of Sonnax Industries Inc., a Bellows Falls, Vermont, supplier of automotive drivetrain products.
Under the terms of the settlement, two company officers and ESOP fiduciaries will pay $2,000,000 to the ESOP to settle claims and an additional $200,000 in civil penalties to the U.S. Department of Labor, while independent fiduciary First Bankers Trust Services Inc. will pay $225,000 to the ESOP and an additional $25,000 in civil penalties. The settlement followed court-ordered mediation.
The U.S. Department of Labor sued Sonnax Industries, company officers and ESOP fiduciaries Tommy Harmon and Frederick Fritz, and Illinois-based First Bankers Trust Services Inc. in December 2016, following the Employee Benefits Security Administration (EBSA) investigation. The suit alleged that First Bankers Trust Services Inc. - hired by Harmon and Fritz as an independent fiduciary to advise the ESOP on the purchase - had the plan overpay for Sonnax Industries stock by millions of dollars, which caused the plan to suffer sizable financial losses.
The final settlement was contingent upon Marmon Holdings Inc.’s purchase of Sonnax Industries for an amount exceeding $65 million. That condition was met on March 31, 2018, when the purchase occurred. At that price, the proceeds allocated to the ESOP participants were estimated to be three times the allocated value of their shares as of Sept. 30, 2016. The settlement also excludes Harmon from receiving any settlement monies and prohibits offset of the payments by Harmon, Fritz, First Bankers Trust Services Inc. or any other party.
“EBSA intends to ensure that stockowners who sell their shares to an ESOP do not receive a windfall at the participants’ expense,” said Carol Hamilton, EBSA’s Acting Regional Director in Boston. “The price an ESOP pays for the stock should reflect its true market value, and advisers who have been retained to fulfill their fiduciary duties under ERISA with regard to stock purchase must represent the interests of the plan participants and beneficiaries.”
“The U.S. Department of Labor will aggressively pursue those who breach their fiduciary responsibilities and place their own interests above those of the plan’s participants, who look to the plan to provide some measure of financial security in their retirement,” said Michael Felsen, the Department of Labor’s New England Regional Solicitor. “This case sends a strong message that the Department of Labor will investigate breaches of fiduciary duty and will hold the defendants personally liable to restore losses to the plan.”
The EBSA’s Boston Regional Office investigated the case, and senior trial attorney Gail E. Glick and trial attorney Niamh E. Doherty in the Department’s Regional Office of the Solicitor in Boston litigated the case. ERISA Counsel Marjorie Butler oversaw the litigation.
Employers and workers can reach EBSA toll-free at 866-444-3272 for help with problems related to private sector retirement and health plans. Additional information can be found at https://www.dol.gov/agencies/ebsa.
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Acosta 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 No. 5:16-cv-00328-GWC
Editor’s Note: This news release was changed to clarify the headline and to show that the consent judgment resolves alleged violations and that the settlement came after court-ordered mediation.