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.