Compliance

Court Finds Price for ESOP Purchase Overvalued

The court found trustee Wilmington Trust “rushed its evaluation of the ESOP, failed to follow its own policies, and failed to adequately vet [other valuators’] conclusions.”

By John Manganaro editors@plansponsor.com | March 17, 2017
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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? 

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