A new lawsuit filed by the Department of Labor (DOL) alleges
the fiduciaries of an employee stock ownership plan (ESOP) established by a Vermont employer violated
their fiduciary duties of loyalty and prudence.
The suit alleges 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 participants 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, according to the DOL.
Background included in the complaint show that early in
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; willfully relied on a flawed valuation of the stock; did not prudently
investigate the transaction’s merits; and purchased highly leveraged Sonnax
stock for far more than fair market value, with the aid and knowledge of
Sonnax, Harmon and Fritz.
DOL suggests 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 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, and enjoin
First Bankers Trust Services from receiving any benefits from its
indemnification agreements with Sonnax that violate ERISA.
The full text of the DOL
complaint is available for download here.