ESOP Fiduciaries to Pay More Than $2 Million to Settle DOL Lawsuit

In ongoing litigation filed by the U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA), the U.S. District Court for the District of Vermont has entered a consent judgment requiring the fiduciaries of the Sonnax Industries’ employee stock ownership plan (ESOP) to pay $2,225,000 to the plan.

The judgment resolves alleged violations of the Employee Retirement Income Security Act (ERISA) stemming from the ESOP’s 2011 purchase of Sonnax Industries Inc., a Bellows Falls, Vermont, supplier of automotive drivetrain products.

Under the terms of the settlement, two company officers and ESOP fiduciaries will pay $2,000,000 to the ESOP to settle claims and an additional $200,000 in civil penalties to the DOL, while independent fiduciary First Bankers Trust Services Inc. will pay $225,000 to the ESOP and an additional $25,000 in civil penalties. The settlement followed court-ordered mediation.

The DOL sued Sonnax Industries, company officers and ESOP fiduciaries Tommy Harmon and Frederick Fritz, and Illinois-based First Bankers Trust Services Inc. in December 2016, following an EBSA investigation. The suit alleged that First Bankers Trust Services Inc.—hired by Harmon and Fritz as an independent fiduciary to advise the ESOP on the purchase—had the plan overpay for Sonnax Industries stock by millions of dollars, which caused the plan to suffer sizable financial losses.

A court last year found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an employee stock ownership plan (ESOP) sponsored by SJP Group Inc. 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’s CEO Vincent DiPano.

The current case in the Vermont court, Secretary vs. First Bankers Trust Services, Inc. et al., involves the Rembar Company, Inc. plan; the Maran, Inc. plan; and the Sonnax Industries, Inc. plan.

The final settlement for Sonnax was contingent upon Marmon Holdings Inc.’s purchase of Sonnax Industries for an amount exceeding $65 million. That condition was met on March 31, 2018, when the purchase occurred.  At that price, the proceeds allocated to the ESOP participants were estimated to be three times the allocated value of their shares as of September 30, 2016. The settlement also excludes Harmon from receiving any settlement monies and prohibits offset of the payments by Harmon, Fritz, First Bankers Trust Services Inc. or any other party.