Compliance May 15, 2023

DOL Proposes Extending UBS, Credit Suisse QPAM Exemptions

The two Swiss financial firms are relying on exemptions granted by the DOL to keep managing retirement plan assets, when they would otherwise be disqualified for a litany of crimes.

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The Department of Labor proposed extending exemptions to UBS Group and Credit Suisse Group, allowing them to manage ERISA-governed retirement plan assets after they merge later this month.

The two firms were both relying on temporary exemptions to act as qualified professional asset managers, or QPAMs, necessary due to both companies’ repeated violations of the law. The DOL said in a notice on the Federal Register on May 12 that it intends to apply these exemptions for one year to UBS after it finalizes a merger with Credit Suisse announced in March.

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A QPAM is a registered investment adviser that can transact on behalf of a plan governed by the Employee Retirement Income Security Act in respects that would normally be prohibited for “parties in interest.” Because of the heightened need for integrity in managing regulated retirement plan assets, QPAMs can be disqualified for criminal convictions. But the DOL will often grant temporary exemptions, primarily to give plans working with the QPAM an opportunity to find another QPAM, as noted in the ruling.

“The terms of this proposed one-year exemption have been designed to permit plans to terminate their relationships with the Affiliated QPAMs and the Related QPAMs in an orderly and cost-effective fashion in the event of an additional conviction or a determination by a plan that it is otherwise prudent to do so,” the regulator wrote.

If confirmed, the exemption will last for one year from the date of the merger, though the DOL indicated it reserves the right to extend it or consider a new application for UBS if necessary to protect the interests of plans working with UBS in its capacity as a QPAM. Since both firms had an exemption and have not committed any disqualifying behavior while using those exemptions, it made sense to apply them to the post-merger firm as well, the DOL explained.

“Covered plan fiduciaries are strongly cautioned that the Department might not extend this one-year exemption following its expiration due to the significant number of convictions and the seriousness of the underlying conduct of the tainted entities that will now reside together within the UBS corporate umbrella following the merger,” the DOL wrote.

According to the DOL, it was not informed of the merger by either company and actually learned of it from news reports, which UBS later confirmed. UBS formally requested an updated exemption on April 17, according to the DOL. The stock sale which will formalize the merger is expected to take place on May 31, the DOL said.

Brad Fay, a member of Seward and Kissel’s ERISA and executive compensation group, explains that the exemptions that businesses receive from DOL require the firm and its affiliates not commit any new crimes. Since the two are merging, neither of their respective exemptions cover the other entity, now an affiliate. The exemption must be updated so that the crimes of the affiliate are not counted as “new.”

The DOL emphasized that this exemption is intended to protect plans from the consequences of an immediate disqualification of UBS, including the costs of finding a new QPAM and negotiating a new contract.

The convictions outlined against UBS and Credit Suisse in the DOL proposal included wire fraud, tax fraud, money laundering and currency manipulation. Credit Suisse assisted U.S. individuals in dodging taxes “for decades,” according to the DOL.

David Levine, a partner at Groom Law Group, explains that many financial institutions are massive and consolidated businesses with many divisions. If one division in a business breaks the law, it isn’t necessarily a threat to plans if personnel that handle retirement plans can continue their work as a QPAM, since they were not involved in the criminality. Levine underlines that one troublesome part of a business should not sink another just because they are under the same corporate umbrella.

Fay adds that the DOL recognizes that one large firm can have many pension plan clients, and disqualifying an entire bank immediately can have “historic ripple effects in the retirement industry.”

The firms’ merger was spearheaded in March by the intervention of the Swiss Federal Department of Finance, the Swiss National Bank and the Swiss Financial Market Supervisory Authority, FINMA. The parties said they made the move to protect the “Swiss economy as a whole” due to threat of the Credit Suisse collapsing.

Compliance May 15, 2023

ESOP Lawsuit Follows Sale to Private Equity Firm

A New Jersey-based graphite manufacturer is alleged to have failed to operate the employee stock ownership plan in the best interests of participants.

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Two Asbury Carbons Inc. employees are suing the operators of the company’s stock ownership plan, claiming they harmed the assets of participants by approving a 2023 company sale to private equity firm Mill Rock Capital at a price below its true market value. The complaint alleges fiduciary breaches committed by the operators of the company stock ownership plan.

Plaintiffs Lance Miller and Larry Richardson brought four separate counts under the Employee Retirement Income Security Act, arguing that plan fiduciaries agreed to a flawed and rushed sale, harming participants’ retirement assets, the filing shows.

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“Defendants approved and facilitated this below-value sale in total disregard of their fiduciary duties under ERISA to act solely for the benefit of the Asbury ESOP participants and beneficiaries,” the complaint states. “Defendants also did not seek to obtain an independent opinion as to the fairness of the proposed sale price to Plan participants and beneficiaries, as they should have.”

The sale to Mill Rock Capital closed on March 24, according to the complaint.

The plaintiffs allege that the defendants are liable under ERISA for failing to provide in a timely manner a summary annual report—purportedly showing a higher value for the ESOP holdings—to the Asbury ESOP participants and beneficiaries for the fiscal year that ended June 30, 2022; for not requiring an independent valuation of the company prior to the sale, as mandated by the plan’s rules; and for failing to provide ballots for voting (as explicitly required by a May 2022 summary plan description) on whether the plan should sell all its company stock holdings to Mill Rock Capital, the complaint alleges.

Named defendants in the lawsuit are Asbury Carbons Inc.; Patrick Sook, CFO at Asbury Carbons; trustee for the Asbury ESOP Neil Brozen, a co-founder and president of Ventura Trust; and Asbury Carbons Inc. Employee Stock Ownership Plan, the court record shows.

The lawsuit is Lance Miller and Larry Richardson et al. v. Neil Brozen, Asbury Carbons Inc., Patrick Sook and Asbury Carbons Inc. Employee Stock Ownership Plan. The lawsuit was filed in U.S. District Court for the District of New Jersey.

Brozen was the target of a separate 2021 lawsuit brought by the Department of Labor, alleging that Ventura Trust, as a trustee of another company’s stock ownership plan, allowed the plan to be sold for less than its market value in violation of ERISA. The lawsuit is ongoing in U.S. District Court for the District of Texas.

Ventura Trust provides transactional and ongoing ESOP trustee services to such plans across the country and consulting services for internal trustees, the plaintiffs’ attorneys state.  

Brozen currently serves as a trustee for 145 ESOP companies in 29 states in industries such as construction, manufacturing, distribution and government contractors, the Asbury plaintiffs’ complaint states.

Requests for comment to Asbury Carbons and Ventura Trust on the lawsuit were not returned.

Plaintiffs Requests

The plaintiffs are seeking monetary relief, including attorneys’ fees and filing costs, along with status as a class action complaint. The plaintiffs asked that the class period for the suit apply  to all participants and beneficiaries, not including the defendants, in the Asbury Carbons Inc. Employee Stock Ownership Plan as of March 24, 2023.

‘Riddle’ at Center

Since the company’s founding in 1895 by Harry M. Riddle, Asbury Carbons has been majority owned by the Riddle family and operated as a family-owned manufacturer of graphite products, according to the complaint.

In 2021, the family determined to sell the company, which required the sale of all the family’s holdings of Asbury Carbons Stock and all the Asbury ESOP’s holdings of Asbury Carbons stock, the complaint states.

To sell the company, the retirement plan executive committee’s responsibility for investigating strategic options was terminated and reassigned by the board of directors to a newly formed Strategic Initiative Committee. The committee was charged only with facilitating the sale of the company, according to the complaint, and it hired Deloitte Corporate Finance to facilitate the sale.

“During the course of that due diligence process, Mill Rock Capital kept lowering their offers, citing deteriorating financial considerations in the financial markets generally,” the complaint states. “Defendants Brozen and Sook knew of these lowered offers. Also, during this due diligence process, members of the executive committee went to the board of directors of the company and advocated that, given the deterioration in financial markets in the second half of 2022, the company not be sold at that time.”

The Board of Directors rejected an effort to delay the sale, the plaintiffs’ attorneys wrote.

Once bids were received, finalists were narrowed down to two bidders, and Mill Rock Capital then provided a sweetened bid of more than $105 million, according to the complaint.

“Mill Rock Capital ultimately would only pay approximately $98 million to purchase all the shares held by the Riddle family and the Asbury ESOP,” the complaint alleges. “Despite their knowledge that the general financial markets were continuing to deteriorate, which directly impacted the price at which Mill Rock Capital was willing to buy the company, the sale was approved by the board and defendant Brozen, and with the complicity of the plan administrator defendants, all to effectuate the Riddle family’s determination to sell the company as quickly as was possible.”

Plaintiffs’ claims

Brozen and the plan administrators were responsible for providing the Summary Annual Reports following each fiscal year, which ends on June 30, to all ESOP participants and beneficiaries, reflecting their interests in the plan, according to the complaint.

The defendants did not provide a summary annual report to the ESOP participants and beneficiaries for the fiscal year that ended on June 30, 2022, and had not provided a report by January 2023, according to the complaint. 

To determine the value of the ESOP’s holdings as of June 30 each year, the defendants employed the services of the Schwartz Heslin Group, which provides advisory, investment banking and business valuation services. The defendants were also responsible for filing the annual Form 5500 with the Department of Labor, which reflected SHG’s valuations.

As of June 30, 2021, the annual statements provided by the defendants to Asbury ESOP participants and beneficiaries, which were based on SHG’s valuation of the Asbury ESOP’s holdings of company shares, stated the net asset value of the ESOP was $38,468,559.

In an April 14, 2022, letter by defendant Sook to retirement plan participants, he said he anticipated an increased value to be reflected in the annual statement.

“The shares of Asbury stock held in the ESOP were previously valued at $2,390 per share as of June 30, 2020, and $3,747 as of June 30, 2021,” Sook wrote. “Since then, the company’s performance has been strong, which will be reflected in your next ESOP statement.”

However, according to the complaint, “On March 29, 2023, Defendant Brozen wrote all Asbury ESOP participants and beneficiaries and advised them that the ESOP had sold its shareholdings and received sale proceeds of $18,371,347.01 for its 19.709 percent interest in the Company’s stock—representing a shocking 52% decline in the value of their retirement accounts from the June 30, 2021, valuation defendants had provided to them and a 42% decline in a December 30, 2021 interim valuation that defendants provided to them,” the complaint states. “Neither defendant Brozen nor the plan administrator Defendants have provided any explanation that would justify $18,371,347.01 as a fair valuation to sell all the Asbury ESOP’s holdings.”

The Court Record

The assets in the Asbury Carbons ESOP are unclear from the complaint. According to the most recent Form 5500, for the period ended June 30, 2022 and filed April 23, 2023, there were 205 participants in the plan.  

The Asbury Carbons ESOP Plan covers substantially all employees of the company and participating subsidiaries of Asbury Carbons Inc., namely Asbury Graphite Mills Inc.; Anthracite Industries Inc.; Asbury Graphite Inc. of California; Cummings-Moore Graphite Co.; Asbury Louisiana Inc.; and Asbury Graphite of North Carolina, according to the complaint. 

The plaintiffs are represented by Jeffrey Klafter of Klafter Lesser LLP, based in Port Chester, New York, and the law offices of Javerbaum Wurgaft Hicks Kahn Wikstrom & Sinins PC, based in New York City. The complaint did not include counsel for the defendants.

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