Bailey & Glasser focuses on ESOPs that invest in private companies, that is companies that are not publicly traded. Federal pension law provides very generous tax subsidies to shareholders and companies that sell their stock to an ESOP. In exchange for these tax benefits, federal law requires that an independent trustee decides whether the stock transaction should happen. Independent trustees are supposed to act like a hypothetical prudent buyer in the market for a private company. Unfortunately, in our experience, these trustees do not conduct sufficient due diligence, do not have a sophisticated understanding of corporate transactions, and are more interested in collecting trustee fees paid by the employer than doing their job.
The Department of Labor recognizes that there are a lot of abusive practices in the ESOP space. It made ESOPs an enforcement priority. Bailey & Glasser has worked closely with the Department on lawsuits. For example, in Jessop v. Larsen, Bailey & Glasser obtained a settlement with the trustee and individual officers of the company that sold its stock to the ESOP totaling $19.8 million. In addition, the settlement required that Bankers Trust exit the ESOP business and agree not to serve as an ESOP trustee again. Bailey & Glasser’s ESOP practice strives for real money for our clients and real changes in the industry.
ESOP Current Cases
Nistra v. Reliance Trust ─ This lawsuit seeks recovery from the trustee to the Bradford Hammacher Group, Inc. Employee Stock Ownership Plan for approving a stock purchase at an inflated price.
- Nistra First Amended Complaint
- Nistra Answer to First Amended Complaint
- Nistra Third Amended Complaint
- Nistra Answer to Third Amended Complaint
- Nistra Order Granting Class Certification
Swain v. Wilmington Trust – This case is brought by participants in the ISCO Industries Inc. ESOP seeking losses to the plan caused when it paid more than fair market value for company stock in 2012. The plan’s trustee is alleged to have violated ERISA by authorizing the stock purchase.
Guidry v. Wilmington Trust – The plaintiff, a former employee of Martin Resource Management Corporation, alleges that the MRMC ESOP paid too much for company stock in a two-stage transaction in 2012 and 2013. He brings suit against the plan’s trustee for the difference between what the plan paid and what it should have paid.
- Guidry Amended Complaint
- Guidry Answer to Amended Complaint
- Second Amended Complaint
- Answer to Second Amended Complaint
Innis v. Bankers Trust Company of South Dakota – A participant in the Telligen, Inc. ESOP alleges that the plan paid too much for Telligen stock in 2013. This suit urges that the plan’s trustee caused transactions prohibited by federal law in connection with the stock purchase.
- Innis Complaint
- Order Re Defendant’s Motion to Dismiss
- Defendant’s Answer to Plaintiff’s Complaint and Affirmative Defenses
McMaken v. GreatBanc Trust Company – The plaintiff in this case is a participant in the Chemonics International, Inc. Employee Stock Ownership Plan. He alleges that the Plan paid too much for this Washington, DC-based company in 2011 when it became the owner of 100% of the company’s stock.
Brown v. Wilmington Trust, N.A. – This suit seeks from trustee Wilmington Trust a payment to the Henny Penny Corporation Employee Stock Ownership Plan of the amount the Plan, and thus its participants, overpaid when it bought Henny Penny Corporation in 2014.
Judge Orders Trustee to Pay $30 Million to ESOP
Alexandria, VA – A federal judge in the Eastern District of Virginia ruled that Wilmington Trust N.A., the trustee for an Employee Stock Ownership Plan sponsored by Constellis Group, Inc., a Virginia-based private security firm, owes ESOP participants $30 million as result of a stock-purchase that violated the Employee Retirement Income Security Act of 1974 (ERISA).
Attorneys from Bailey & Glasser represented the employee participants of the ESOP. They filed suit claiming that Wilmington caused the ESOP to purchase $200 million-plus of Constellis stock at an inflated price, violating federal pension law and trustee duties. Less than a year later, Constellis was sold and the ESOP was dissolved.
United States District Court Judge, Leonie M. Brinkema ruled that, “the defendant [Wilmington] engaged in a prohibited transaction by failing to ensure that the ESOP paid no more than adequate consideration for the stock in Constellis and, as a result, damaged the ESOP by agreeing to overpay $29,773,250.00 for the stock.” Brinkema found Wilmington liable for $29.8 million in damages for overpaying for the company stock.
Bailey & Glasser partner Gregory Porter said, “The decision lays out important new guidance for ESOP trustees on many valuation issues. Two stand out. First, the court held that valuation firms and the trustees cannot blindly accept management projections but must scrutinize projections for consistency with past projections and evaluate the self-interest of managers making the projections. Second, the court held that it was improper for the ESOP to pay a control premium when the selling shareholders retained control of the board of directors; instead, the ESOP should have received a discount for lack of control. Both are common problems in ESOP transactions.”