SCOOTER Store ESOP Participants Claim Fiduciary Breach by CEO

The plaintiffs argue an “inherent and potentially disabling” conflict of interest occurred because Douglas Harrison held dual positions as the President and CEO and primary shareholder of the company and as the trustee of the company’s ESOP. The suit argues that Harrison could have sidestepped his conflict by resigning as trustee of the plan.

According to the 49-page complaint filed in the U.S. District Court for the Western District of Texas, Harrison, as trustee of The SCOOTER Store Employee Stock Ownership Plan, knew the company was the target of congressional oversight and criminal investigations when he continued investing plan assets in company shares.

The SCOOTER Store, which manufactures power wheelchairs, hit some trouble in 2003 when Congress began an investigation of power mobility equipment. The Centers for Medicare & Medicaid Services of the U.S. Department of Health and Human Services later reviewed whether and under what circumstances the federal government would fund the equipment to Medicare beneficiaries and at what price. The Justice Department also conducted a company investigation, the suit said.

The suit says the federal government was the company’s primary customer – representing more than 80% of revenues from 2003 to 2005.

As a result of these investigations, the company stock in the plan plummeted from $211 a share in 2002 to $16.34 in 2003 – which participants claim had catastrophic effects on the value of their accounts. Named plaintiff Carol L. Oren-Bosquet’s account, for example, dropped from $17,407.73 to $3,777.90.

Plaintiffs claim that instead of stepping down from his role as the trustee of the plan, Harrison used his insider information to favor interests of the company at the expense of the participants. Among a number of fiduciary breach claims is that Harrison caused the plan to purchase company stock at grossly-inflated prices that Harrison knew on the basis of material, non-public information to exceed fair market value.

According to the complaint Harrison had the plan purchase $4 million in additional company stock in December 2002 at the $211 price – at which point he knew about the government probes.

The claim also charges Harrison with breaching his fiduciary duty by allowing his father and other SCOOTER Store insiders to sell the company stock to the plan at inflated prices that Harrison knew were above market value.

LaSalle Bank N.A. as Harrison’s successor trustee is also accused in the suit of continuing to invest virtually all plan assets in company stock over the three-year period during which plan accounts were virtually wiped out.