Compliance July 24, 2023

Trustee GreatBanc Trust, Company Executives Sued for Disputed ESOP Sale, Valuation

Former employees are suing GreatBanc Trust Co. and executives from Buckeye Corrugated Inc., a national packaging and display products manufacturer, over the latter’s 2018 sale.

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Two former workers and vested participants in the Buckeye Corrugated Inc. Employee Stock Ownership plan sued plan trustee GreatBanc Trust Co. and several Buckeye executives on July 21 for alleged losses suffered by the plan and its participants when they allege GreatBanc caused the plan to sell shares of Buckeye to the management purchasers for less than fair market value.

The plaintiffs, Eric Finkle and Justin Whipple, allege four counts of fiduciary breach under the Employee Retirement Income Security Act against the defendants in Finkle et al v. GreatBanc Trust Company et al., filed in U.S. District Court for the Northern District of Illinois, Eastern Division.

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Doug Bosnik, Buckeye’s president and CEO; Mark Husted, its chief financial officer and executive vice president; and Jon McGurk, its COO, were also named in the litigation, as were 10 unnamed individuals.

“[The] Plaintiffs … suffered a diminution in the value of their Plan accounts, and an insufficient distribution of moneys from their Plan accounts upon termination of the Plan, because the Plan received less than fair market value for its Buckeye stock,” the complaint states. “The Management Purchasers are liable under ERISA for knowingly participating in the prohibited stock transactions and GreatBanc’s breaches of fiduciary duty, and as co-fiduciaries to GreatBanc who participated in, enabled, and did not make reasonable efforts to remedy GreatBanc’s breaches of fiduciary duty.”

Buckeye was a privately held company and was the ESOP sponsor until September 2018, when GreatBanc, in its capacity as trustee, caused the plan to sell 100% of the issued and outstanding shares of Buckeye common stock, directly or indirectly, to high-level Buckeye executives and management purchasers for approximately $231,854,904, the complaint shows.

The complaint alleges GreatBanc, with Buckeye management approval, executed the sale at an improper price below fair market value.

“At the time of the 2018 ESOP Transaction, GreatBanc improperly valued Buckeye stock on a liquidation basis, despite its being an ongoing concern that is in business to this day,” the complaint states. “Buckeye was a growing and consistently profitable company worth far more than its liquidation value. By valuing Buckeye on a liquidation basis, GreatBanc undervalued the value of Buckeye stock in the Plan, failed to use sound business principles in its 2018 valuation, and failed to negotiate for the Plan to receive fair market value for its stock.”

The complaint adds that the company in December 2018 “estimated the value of Buckeye stock as approximately $270.85/share, which is approximately 13% more per share than the average the Plan was paid per share in the [September] 2018 ESOP Transaction.”

GreatBanc Trust was targeted on the first two counts for permitting transactions prohibited under ERISA and for failing to discharge duties solely in the interest of participants and beneficiaries. The manager purchasers were charged with violating the ERISA provision against a party in interest engaging in a prohibited transaction with respect to an employee benefit or pension plan and for participating in such a breach.

“GreatBanc did not conduct adequate due diligence for the 2018 ESOP Transaction regarding Buckeye’s future growth prospects or industry trends for the corrugated packaging industry, including increasing demand from the e-commerce market,” the complaint alleges. “GreatBanc improperly relied on projections and financial information supplied by Buckeye management … without properly probing and questioning the projections and financial information or the assumptions and conclusions of GreatBanc’s financial advisors.”  

Husted was the plan administrator from 2009 through 2019, while Finkle and Whipple both worked for Buckeye at the firm’s Rochester, New York, division, for at least 20 years, according to the complaint.

The plaintiffs filed suit in Illinois because some of the acts or omissions occurred in that district, and the plan was administered in part in the district where plan trustee GreatBanc operated. The complaint asks the court to certify Finkle and Whipple as representative of the purported class of participants.

Fairlawn, Ohio-based Buckeye was founded in 1985 and produces a variety of corrugated board packaging and display products, with locations in eight states and more than 850 workers in the U.S. Buckeye adopted the ESOP on January 1, 1994, and it was terminated as of December 20, 2018.

The plaintiffs are represented by attorneys with the law offices of Bailey & Glasser LLP, based in Chicago, including Ryan Jenny and Gregory Porter, based in Washington, D.C.; and Feinberg, Jackson, Worthman & Wasow LLP, headquartered in Berkeley, California.  

Representatives for neither GreatBanc Trust Co. nor Buckeye Corrugated Inc. responded to a request for comment.

Compliance July 24, 2023

PBGC Issues FAQ on Acceptable SFA Investments

Permissible return seeking assets are normally SEC-registered common stock, and investment grade fixed income includes investment-grade bonds and US treasuries.

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The Pension Benefit Guaranty Corporation last week clarified in an FAQ what investments qualify as “return seeking assets” and “investment grade fixed income” for pension funds investing money received from the Special Financial Assistance fund.

Multiemployer plans receiving Special Financial Assistance under the American Rescue Plan must invest all of the money they receive from the PBGC into IGFI investments if they applied under the interim rule issued in July 2021. If they applied under the final rule, issued in July 2022, they can invest up to 33% in RSAs, and the remaining 67% must be in IGFI.

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Though the PBGC wrote in the FAQ that it believes “the meaning of these terms is well understood by sophisticated investors,” they acknowledged some confusion among pension managers.

“Investment grade” is defined in Section 4262.14 of the SFA regulations as “securities for which the issuer (or obligor) has at least adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure,” according to the FAQ. Credit ratings from credit agencies cannot be used in this determination under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Some examples of IGFI investments include securities issued by the U.S. government, investment-grade municipal bonds, money market funds and cash or cash equivalents. Debt which pays a fixed amount or rate, is denominated in U.S. dollars, originates from an SEC-registered issuer and meets all investment grade criteria, also qualifies.

Mutual funds, exchange-traded funds and collective funds can be vehicles for IGFI, depending on their composition.

The PBGC wrote that if an ETF or mutual fund abides “by an investment policy that restricts investment predominantly to permissible IGFI securities,” it would qualify as IGFI and “generally, the types of investment grade securities included in a typical aggregate U.S. bond index fund are permissible IGFI securities, except fixed-to-float securities or those resold in reliance on the SEC’s Rule 144A,” which defines certain qualified investors for private placements.

As for permissible RSAs, the PBGC explained that these investments typically include common stock registered with the SEC and offered on a U.S. exchange. This can include foreign stock and real estate investment trusts.

The PBGC also offered several examples of investments that are not permissible as return-seeking assets, including stocks traded over the counter, stocks traded on foreign exchanges, funds invested in foreign markets, high-yield bonds and alternative investments—including private credit and “direct real estate or hedge funds and investments with or that create leverage.”

The PBGC also said it does not provide “upfront advice” or pre-approval of an investment strategy or asset class. Certain investments may be found non-compliant in an audit, though the PBGC did not elaborate.

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