USA Says Firms Rolled Workers on Stocks
MANHATTAN (CN) - The Secretary of Labor sued First Bankers Trust Services twice in Federal Court, claiming it allowed two co-defendant companies to sell their own employees overpriced company stock for retirement plans.
First Bankers Trust Services is the lead defendant in both cases.
Also sued are Maran Inc. and The Maran Inc. Employee Stock Ownership Plan, in the first case filed, and the Rembar Employee Stock Ownership Plan and Rembar CEO Frank Firor in the second complaint.
First Bankers Trust, based in Quincy, Ill., is a full-service trust company that serves as trustee for employee stock ownership plans.
An ESOP is a retirement plan that is permitted to invest some or all of its assets in employer stock. Participants' benefits depend on the plan buying and selling stock for fair market value.
The first complaint alleges that First Bankers violated the Employee Retirement Income Security Act (ERISA) in 2006, when it approved the Maran ESOP purchase of 49 percent of the outstanding stock of Maran Inc. for $71 million, which was more than fair market value. As a result, the plan's participants suffered significant losses, Secretary of Labor Hilda Solis claims in the complaint.
Maran, headquartered in New York City, makes denim jeans and other apparel for retailers, including Wal-Mart and Kmart. The company adopted its employee benefit plan in November 2006, and hired First Bankers as an independent trustee to determine whether, and at what price, to buy Maran shares from the company or from majority shareholders.
Maran's employee benefit plan is funded exclusively through employer contributions. The plan, which had 88 participants as of December 2011, owns 49 percent of Maran's stock, according to the complaint.
"The ERISA violations arise from First Bankers' failure to protect the ESOP's interests in connection with the ESOP's purchase of Maran stock from the company's top two executives and largest shareholders: David Greenberg ('Greenberg'), Maran's chief executive officer, and Richard Huang ('Huang'), Maran's executive vice president, chief operating officer, and chief financial officer (collectively, 'the sellers')," according to the complaint.
"First Bankers caused the ESOP to buy stock from Greenberg and Huang, who were parties-in-interest to the ESOP, for more than the stock's fair market value based on a flawed valuation of the stock, and without prudently investigating the merits of the transaction on behalf of the ESOP. As a result, First Bankers violated ERISA's prohibited transactions provisions and duties of prudence, loyalty, and adherence to plan documents."
Greenberg and Huang, the plan's administrators, are not named as defendants.
In November 2006, the Maran plan bought 49,000 shares of Maran's convertible preferred stock from Huang and Greenberg for about $71 million, according to the complaint.
"The convertible preferred stock was common stock with additional rights to dividends worth 10 percent of the purchase price for eight years, valued at approximately $32 million," the complaint states.
The government claims that First Bankers, acting on behalf of the plan, borrowed $71 million from Maran to fund the purchase.
Five years later, "On Dec. 31, 2011, the Maran stock purchased by the ESOP was appraised to be worthless," the complaint states. "On April 20, 2012, Maran, Huang, Greenberg, and First Bankers, which was acting on behalf of the ESOP, agreed to restructure the 2006 transaction. Maran agreed to reduce the ESOP's outstanding loan principal from approximately $53 million to approximately $1 million. The ESOP, in turn, agreed to convert all 49,000 of its Maran preferred shares into 49,000 shares of Maran common stock, and to waive all of its accrued but unpaid preferred dividends and its rights to unaccrued dividends. None of the principal or interest the ESOP had already paid for Maran stock - approximately $17 million - was returned to the ESOP as part of the 2012 restructuring."
Because Maran is not a publicly traded company, First Bankers and Maran hired an accounting firm to estimate the fair market value of the Maran stock offered to the employee benefit plan. The firm estimated the stock value to be in the range of $65 million to $73 million, according to the complaint.
The government claims the firm unreasonably relied on Maran's aggressive growth projections, which were not supported by its previous performance, at a time when the U.S. economy was slowing down.
It claims that the firm minimized business risks, such as Maran's "troubling dependence on a single customer," Wal-Mart, and the company's volatile sales history, in its assessment.
First Bankers relied on the flawed appraisal report, which estimated the stock value was much higher than its fair market value, when it authorized the 2006 transaction, causing the plan to overpay for the shares, according to the complaint.
"First Bankers' decision, on behalf of the ESOP, to enter the 2006 transaction was imprudent, disloyal, and illegal because First Bankers, based on a flawed valuation that it did not adequately investigate, caused the ESOP to purchase Maran stock from parties-in-interest to the ESOP for more than the stock's fair market value," the government claims. "The purchase violated the 2006 trust agreement and ERISA, both of which required that the trustee perform its duties solely in the interests of the plan's participants and beneficiaries and that all purchases of Maran stock by the trustee be made only at prices which do not exceed the fair market value as of the date of purchase."
The government wants Maran to indemnify First Bankers under the trust agreement, unless a court finds that First Bankers breached its fiduciary duties under ERISA or engaged in gross negligence.
First Bankers improperly accepted a percentage of the market value of the plan's assets for its services while at the same time having discretion to determine their value, according to the complaint.
In the second lawsuit, filed in White Plains, N.Y., the government claims First Bankers breached its fiduciary duty under ERISA while acting as trustee for the Rembar pension plan.
Headquartered in Dobbs Ferry, N.Y., Rembar manufactures and distributes precision parts made from refractory metals.
The company hired First Bankers as a trustee to its employee stock ownership plan, which was adopted in 2005.
In June 2005, Rembar and First Bankers authorized the plan to buy 100 percent of the company's stock from Firor and two other Rembar shareholders, according to the complaint.
The government claims the plan borrowed $15.5 million from Rembar to fund the transaction, and signed an agreement which allowed Firor to maintain control of the company after the plan bought it.
It claims First Bankers relied on a flawed appraisal and authorized the purchase at an inflated price, without further investigating.
The government seeks to recover all losses and enjoin First Bankers from serving as a trustee or fiduciary to any ESOP plan.
"ESOP participants depend on the plan to buy and sell sponsor-company stock at fair market value," Jonathan Kay, regional director of the Labor Department's Employee Benefits Security Administration's New York Regional Office said in a statement.
"The department is committed to making sure that the ones responsible for making these decisions are fulfilling their fiduciary duties to protect the interests of the ESOP participants."
The Plan Benefits Security Division of the Department of Labor's Office of the Solicitor represents the government in the Maran action.
The Rembar lawsuit was filed by the department's Regional Office of the Solicitor in New York.