Following a bench trial in a complex employee stock
ownership plan (ESOP) lawsuit, a district court has held that Wilmington Trust
is liable for violating Section 1106(a)(1)(A) of the U.S. Code, but not liable for
violating parts (a)(1)(B) or (b) of that section.
The lead plaintiff in the case is a former employee of
Constellis Group, Inc., and a former participant in an employee stock ownership plan (ESOP) created and terminated by the private security firm. Defendant Wilmington Trust N.A. “was
the trustee for the ESOP in connection with Constellis' creation of the ESOP.”
Background included in the text of the decision, handed down
by the U.S. District Court for the Eastern District of Virginia, shows that
creating the ESOP involved the purchase of 100% of Constellis' voting stock in
December 2013. Less than a year after the ESOP was created, according to the
decision, “all its stock was sold.”
Plaintiffs alleged that the 2013 purchase “involved
transactions and payments prohibited by the Employee Retirement Income Security
Act of 1974, 29 U.S.C. § 1106, resulting in the ESOP paying an inflated price
for the Constellis stock.” Specifically, plaintiffs alleged that the $4,235 per
share paid in 2013 “was not the fair market value of such stock, resulting in
the ESOP overpaying for the stock by $103,862,000, which plaintiff seeks to recover
for the ESOP.”
In the end the court ruled that Wilmington is liable for causing
nearly $30 million in damages to the ESOP—far below what participants claimed
they were entitled to, but a significant result nonetheless.
Case documents show the ESOP in question was created through an extensive process of projections and analysis, which included discussion of multiple potential approaches and wide swings in valuation projections made by contracted experts.
NEXT: The shortest
lived ESOP on record?