Compliance April 18, 2017

House Passes Bill Encouraging Employee Stock Ownership

The Encouraging Employee Ownership Act would increase the cap on the amount of stock closely held companies can award employees before triggering certain SEC reporting requirements.
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The House of Representatives passed the Encouraging Employee Ownership Act (H.R.1343) by a bipartisan vote of 331 to 87.

A press release from the office of Congressman Lee Zeldin (R-New York) says the legislation would reform the outdated Securities and Exchange Commission (SEC) Rule 701, which imposes a slew of complicated regulations on small businesses, especially newly formed start-ups. SEC Rule 701 exempts companies below a $5 million threshold to offer securities as part of employees’ compensation without having to comply with federal securities registration requirements. Companies over the threshold must provide additional disclosure, “creating a significant obstacle for companies that want to compensate their employees through equity or other securities such as stocks,” the release says.

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According to an update by the National Center for Employee Ownership (NCEO), the bill would increase to $20 million the current $5 million cap on the amount of stock closely held companies can award employees before triggering certain SEC reporting requirements. The amount would be indexed for inflation annually.

Congressman Zeldin says, “The Encouraging Employee Ownership Act of 2017 is bipartisan legislation that will help small businesses grow and expand, encouraging job creation and economic growth, by allowing companies to retain their employees through incentives.”

Text of the bill and actions related to the bill can be viewed here.

Compliance April 18, 2017

Fiduciary Caused ESOP Participants To Overpay for Company Stock

A New Jersey District Court judge awarded more than $9.4 million to the plan.
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A federal judge, presiding over a U.S. Department of Labor lawsuit, has found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an employee stock ownership plan (ESOP) when it caused the plan to overpay for shares of the company’s stock.

U.S. District Judge Michael A. Shipp of the U.D. District Court for the District of New Jersey awarded to the plan $9,485,000 (plus interest), subject to the reduction in a 2016 consent order against SJP Group Inc.’s CEO Vincent DiPano.

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SJP Group, the plan’s sponsor, hired First Bankers as an independent fiduciary to advise the company’s plan on whether, and at what price, to purchase company stock from its majority shareholder DiPano.

An investigation by the department’s Employee Benefits Security Administration found violations of the Employee Retirement Income Security Act (ERISA) and, on July 17, 2012, the department filed suit against both First Bankers and DiPano seeking to recover losses suffered by the plan participants.

Following a 17-day trial, the court held that First Bankers breached its fiduciary duties to the plan’s participants by failing to conduct a prudent investigation into the fair market value of the shares. As a result, First Bankers approved the participants’ purchase of 38% of the outstanding stock of SJP Group from DiPano for $16 million, which was nearly $10 million more than what the stock was worth.

Shipp held that First Bankers failed to independently and thoroughly investigate the true value of the shares. As the plan’s fiduciary, it was responsible for ensuring that the participants paid no more than fair market value for the shares. In addition, Shipp found First Bankers relied on unrealistically optimistic projections of SJP’s future earnings.

“Participants’ retirement benefits depend on the plan buying and selling stock for fair market value, the department intends to make certain that the price a plan pays for the plan sponsor’s stock reflects its true market value,” says Jonathan Kay, EBSA’s regional director in New York. “Those retained to advise a plan about the stock purchase must fulfill their fiduciary duties under ERISA and prevent those who sell their shares to a plan from receiving an unwarranted windfall.”

In a 2016 consent order, the department resolved its allegations that DiPano violated his fiduciary duty by failing to monitor First Bankers adequately. DiPano agreed to pay $2.25 million in restitution and a penalty.

The department is currently in litigation with First Bankers in three other matters, in which the department similarly alleges that First Bankers failed to prudently determine the proper value of plan shares resulting in substantial losses to plans and their participants. The matters are all filed under the name of Secretary vs. First Bankers Trust Services, Inc. et al. The matters involve the Rembar Company, Inc. plan; the Maran, Inc. plan; and the Sonnax Industries, Inc. plan.

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