DOL Accuses ESOP Fiduciaries of Prohibited Transactions

The Department of Labor (DOL) has filed a complaint alleging that fiduciaries of the BAT Masonry Co. Inc. Employee Stock Ownership Plan (ESOP) breached their duties of prudence and loyalty to the ESOP and engaged in prohibited transactions in connection with the ESOP’s purchase of the company stock and one trustee’s withdrawals of cash thereafter, in violation of the Employee Retirement Income Security Act (ERISA).

The complaint further alleges that fiduciaries effectively abandoned the plan and breached their fiduciary duties.

According to the DOL, BAT Masonry Co. Inc., the sponsor and administrator of the plan, established the ESOP as of May 1, 2009. The trustees of the plan were Wayne B. Booth, Gregory Booth and Melvin Hinton. In July 2010, the ESOP purchased all the stock of the company from the Wayne Booth Revocable Trust, an entity controlled by Wayne Booth, for $1.6 million in cash and two promissory notes in the amount of $11.9 million, a total purchase price of $13.5 million.

The purchase price was based on a valuation of the company conducted by SMK, which the company had hired for that purpose. However, the DOL says SMK’s valuation of the company was flawed in several respects, resulting in the ESOP overpaying the Wayne Booth Revocable Trust for the company stock.

SMK failed to account for the deteriorating fundamentals of the company’s business and improperly treated $5.8 million that Wayne Booth had previously withdrawn from the company’s account, and which he never intended to repay, as an account receivable, among other errors. The trustees of the plan relied on SMK’s valuation, despite knowing the financial condition of the company was deteriorating.

In December 2010, the company hired another valuation firm, which valued the company at $163,590, more than $13 million less than what the ESOP had paid for company stock only months before.

In addition, Wayne Booth continued drawing cash out of the company after the ESOP transaction, even though he no longer held any ownership interest. These withdrawals totaled at least $1.25 million. The company treated these withdrawals as payments from the ESOP to Wayne Booth, even though Booth’s withdrawals bore no relationship to the terms of the ESOP note, and the ESOP never received company shares in return for Booth’s withdrawals.

BAT Masonry Co. went out of business in mid-2012, rendering the shares held by the ESOP valueless. At this time Gregory Booth and Hinton started their own company, M.H. Masonry. M.H. Masonry employs many of the same employees as the now-defunct BAT Masonry, purchased equipment owned by BAT at a significant discount, and is located at the same address as BAT.

The lawsuit seeks to require each of the fiduciary defendants jointly and severally to restore all losses caused to the plan as a result of their fiduciary breaches. It further seeks disgorgement of any and all unjust enrichment that certain fiduciaries received as a result of their fiduciary breaches.

The DOL’s complaint can be viewed here.