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Breach of Esop Fiduciary Responsibility? I need some guidance.


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I work for an Esop Company and it appears we are being sold although no one has been formerly told. The signs are all there. In 2008 our stock price was worth double what it is today. The owners have hired their families and friends and showed favoritism in wages and advancement while telling the rest of us there wasn't much profit so here is a 2% raise. Then they turn around and hire another family member or friend at a high wage. They also have a separate company that they have owned for years which they purchase warehouse building that they lease back to our company essentially letting our company pay for them. They setup the leases so that our company is responsible for all maintenance and repairs, so when they buy a building through their one company, they thy renovate it and make the Esop company pay for it. They have also turned in numerous expenses that probably had nothing to do with business. When they purchased the one building that the Esop leases, they gave themselves a $333,333.00 bonus each (There are 3 primary owners)to pay to have the building built that they then turned around and leased to the Esop.

Recently they fired a 30 year employee and layed off a 25 year employee with Muscular Dystrophy. I think they did it in order to obtain their shares of Esop stock.

They also have donated thousands of dollar in material to different organizations that they are affiliated with for the prestige I am sure. This has taken from our Esop profits. 

The Trustee is a long time friend of theirs.

On top of all these  things, they have made many bad decisions that have affected our stock price. I fear that an announcement will be made in a few weeks that they have sold the company and many of us will lose our jobs. Do we have any recourse? Can we do anything after the sale goes through, or are we just screwed?

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If what you are saying is true there are issues. 

It is mostly in the areas of the leases of building they have interests in.  These can be a problem. 

As a rule there is nothing wrong with hiring relatives as long as their compensation is reasonable.  It seems to me it would be hard to prove a case here unless it is outrageous.

Likewise bonuses in themselves are not a problem as long as they can be found to be reasonable compensation.  How much to compensate someone can be as much art as it is science.

Let's be clear here just because things go badly isn't a violation of the law.  Business is about risk and some times those risks turn out badly. 

Yes, the trustee is often times the one who is supposed to ask the hard questions on this. 

I almost never recommend going to the DOL as the first move.  It is an extreme action that is very hostile.  It can cost the company a lot to defend against the DOL and the money spend doing that is money not going into your pocket often times.  But in this case if you think you can document it well go to the  DOL.  I am not aware of too many private actions you can take regarding what you are talking about.  If you can find an attorney willing to take such a breach of fiduciary lawsuit you might have something.  I just not heard of this kind of action.  We see 401(k) fiduciaries getting sued over fees but there is a lot more objective data to use in a court.

I am sure in the morning the attorneys who show here can speak more to that.  But my guess is just about the only choice you have is trying to get the DOL to get on your side. 

Give us further updates as events unfold. 

 

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Thanks for the reply. I appreciate it. It's a shame that so many will be out of jobs after many years of dedicated service. I have also heard that the owners have probably made a deal to protect friends and family that work their while the rest of us get axed to reduce expenses. The owners can tell the new owners how valuable these friends and family members are, and the new owners probably have no idea during their negotiations  that they are even related.

 

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11 hours ago, ESOP Guy said:

If what you are saying is true there are issues. 

...

I am sure in the morning the attorneys who show here can speak more to that.  But my guess is just about the only choice you have is trying to get the DOL to get on your side. 

Give us further updates as events unfold. 

 

First, listen to ESOP Guy - his handle is appropriate - for a reason.

Second, I would agree that a private cause of action might be a stretch - at this point in time.  ESOP litigation usually centers around valuation issues.  If the company is being sold then valuation can be an issue - but to be honest, the "primary owners" usually are trying to get as much as they can for the company - and ESOP participants benefit from that as well.

Third, I think you should contact the DOL.  Find the office whose jurisdiction includes your company's headquarters and as to speak to a "benefits consultant."  Be prepared and organized with FACTS (preferably documented) to relay your story.  Incompetence in running a company is not something that you can seek redress for, but self dealing, mismanagement of corporate/ESOP assets, and a variety of other things may be.  Selling the company for "less than fair market value" in order to protect themselves (jobs, leases on property held outside the company, and the like) COULD be a problem.  As I said before, it comes down to "valuation" issues, and conflicts of interest (self-dealing) and that would pique the curiosity of the DOL.

The DOL is very interested in ESOPs these days....

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39 minutes ago, MoJo said:

Third, I think you should contact the DOL.  

MoJo, should such contact be initiated by his (ESOP-fluent) attorney?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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1 hour ago, david rigby said:

MoJo, should such contact be initiated by his (ESOP-fluent) attorney?

Not necessarily.  DOL benefit consultants are trained to deal directly with participants - so why would you pay an attorney to make the call?  Let the DOL do the leg work of investigation, and if a case arises, an attorney may be more likely to take the case.

 

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45 minutes ago, MoJo said:

Not necessarily.  DOL benefit consultants are trained to deal directly with participants - so why would you pay an attorney to make the call?  Let the DOL do the leg work of investigation, and if a case arises, an attorney may be more likely to take the case.

 

I agree unless this person has great documentation about the conflict of interest parts which if true are look like Prohibited Transactions let the DOL decide if there is something and do the legwork to document.  An attorney working for the participants has to go to court to get a subpoena if it comes to that but the DOL can make a company comply often times to document requests. 

Let's be clear here we have only heard one side's story.  While it could be true there can be an other side.  But the DOL has the best chance to decide which side the facts line up with.  If I thought there was a less extreme action like talk to management that could clear this up I would advocate that like I often times do when people come to this board with such stories.  But in this case I am just not seeing what the conversation would look like.  I doubt management is going to show ownership documents and leases even if there is nothing going on.  That just isn't something you typically do as management. 

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4 minutes ago, ESOP Guy said:

I agree unless this person has great documentation about the conflict of interest parts which if true are look like Prohibited Transactions let the DOL decide if there is something and do the legwork to document.  An attorney working for the participants has to go to court to get a subpoena if it comes to that but the DOL can make a company comply often times to document requests. 

Let's be clear here we have only heard one side's story.  While it could be true there can be an other side.  But the DOL has the best chance to decide which side the facts line up with.  If I thought there was a less extreme action like talk to management that could clear this up I would advocate that like I often times do when people come to this board with such stories.  But in this case I am just not seeing what the conversation would look like.  I doubt management is going to show ownership documents and leases even if there is nothing going on.  That just isn't something you typically do as management. 

Like I said, listen to ESOP Guy....

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15 hours ago, Disgruntled said:

 The owners can tell the new owners how valuable these friends and family members are, and the new owners probably have no idea during their negotiations  that they are even related.

 

Side note:  If the (soon-to-be) new owners did not do their due diligence, that's on them.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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One situation you have issue with is terminating long-term employees so that the owners can get their stock. Vesting will ensure that your Plan account balance will not just disappear. In fact, they will most likely swap your stock out for cash or possibly invest that into a mutual fund within the Plan so that sounds like a better deal than holding stock in a declining atmosphere.

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  • david rigby changed the title to Breach of Esop Fiduciary Responsibility? I need some guidance.

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