Compliance September 19, 2005

ESOP Trustee Secretly Takes Over Company

September 19, 2005 (PLANSPONSOR.com) - The US District Court for the Western District of Tennessee found that an Employee Stock Ownership Plan (ESOP) trustee breached his fiduciary duties under ERISA when he purchased all of the ESOP's stock and did not disclose his purchase.
Reported by

According to BNA, Lawrence Scott was president of Memphis Equipment Co. (MEC) when, as the court said, he “orchestrated” a takeover of the company by getting a $2.3 million loan to purchase all of the company’s stock, which was held in the ESOP.  

The purchase occurred in January of 1999 and was disclosed in the ESOP’s annual report to the Department of Labor in August of 1999.   The court found that the purchase was not disclosed in the summary annual reports given to ESOP participants, according to BNA.

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Two other plan trustees, Max May and Billy Thompson, learned of the stock sale in late 2002, and sued Scott for improperly acting without the approval of MEC’s board of directors, breaching his fiduciary duties as a director and officer of the company, and wrongfully converting company funds.   BNA reports that, according to the court opinion, May and Thompson also alleged that Scott engaged in a prohibited transaction, breached his fiduciary duties, and failed to properly disclose information regarding the ESOP to plan participants.

In November of 2004, the district court rescinded Scott’s stock purchase.

In the recent opinion, the court also said that Scott caused losses to the plan when he used company assets for his own personal use.   BNA reports that t he court ordered Scott to repay $627,924 to MEC, and $455,721 of that amount constituted losses to the ESOP that resulted from Scott’s failure to disclose the transaction. In addition, the court agreed with May and Thompson that Scott should be required to forfeit his own personal interest in the ESOP as a way of repaying the $455,721 loss incurred by the ESOP.

The case is May v. Scott, W.D. Tenn., No. 03-2112 M1/P, 8/31/05.

Compliance September 16, 2005

Drugmaker Cleared of COBRA Notice Wrongdoing

September 16, 2005 (PLANSPONSOR.com) - A Delaware federal judge has thrown out part of a lawsuit filed by a former AstraZeneca Pharmaceuticals employee over a required health coverage notice, but refused to dismiss the plaintiff's Family and Medical Leave Act (FMLA) allegations.
Reported by

US District Judge Kent Jordan of the US District Court for the District of Delaware cleared the prescription drugmaker of any wrongdoing in providing health coverage notice under the ConsolidatedOmnibusBudgetReconciliationAct ( COBRA ).

Jordan ruled that COBRA requires only a good faith effort to provide notice of COBRA rights and that AstraZeneca had no duty to ensure that plaintiff Marybeth Farrell received the election notice. Jordan   concluded that AstraZeneca, through its TPA, had made a good faith effort to notify the employee of her COBRA rights.

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However, Jordan ruled that Farrell had put forth a strong enough case on allegations the company retaliated against her by disciplining and then firing her in January 2004 because of her FMLA complaints that the remainder of her suit should proceed.

Despite Farrell’s assertions that her work performance had not been questioned before the medical leave issue arose, the company claimed her supervisors had been having problems with her work for some time. Not only that, but the employer alleged that Farrell became hostile at work after she returned from her leave and that customers and clients complained about her behavior.

The ruling is  here . 

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