ESOP

[Guest sooner1]

I work for a company with a 40% ESOP ownership. The current ESOP valuation was influenced by a trustee(CEO) to lower the value. The CEO felt the value was high and the firm doing the valuation lowered the price. It appears the valuation was improperly influenced because the audit firm had already issued a preliminary value and further conversations caused the value to be reduced. In all of the previous years, the value had never been reduced after the preliminary value was issued. BTW-the trustee is no ESOP expert and this appears to impact the independent requirement on the part of the audit firm. Is this legal?

Thoughts PLEASE.

[GBurns]

Aside from ethics, what cause you to be concerned ? What negative effect does a reduced evaluation have ?

[Guest sooner1]

The concern is that the value of the ESOP was reduced by almost 10% which can add up to tens of thousands of dollars for some and 1 million for the entire ESOP. ESOP owners do not control any activity in the ESOP and can not sell their company stock until they terminate their employment. Employees leaving have sold their ESOP shares and are receiving the lower value. These former employees do not know this happened and assume it was caused by normal economic factors. Most board members and shareholders do not know this happened either. Also, this value sets the tone and pretty much the price for other trading of company stock outside the ESOP.

The ethics issue is very important as well. We seem to be seeing a trend.

Employees were harmed and a class action may be brewing as more people find out.

[QDROphile]

Thoughts, no conclusions:

1. The fiduciary has a duty to review, understand, and agree with (at some level) the valuation. The fiduciary is ultimately responsible for the price that is determined.

2. The valuation process always involves discussion with management. Even though the valuation is typically a snapshot at a past date, the valuation includes forward looking elements. Discussion with management can lead to adjustments because misunderstandings can be corrected and new iformation can come out. Review of a draft valuation can be a useful tool for the discussion.

[Marcus R Piquet]

Here are a few more thoughts:

1) I'm more surprised there hasn't been a revision to the preliminary valuation in the past. There's a reason it's called "preliminary" - it's the fiduciary's duty to review the data and assumptions used in the valuation and vigorously question the same. In my experience, this process leads to a revision as often as not. The fact that there was a revision to a preliminary value proves nothing in and of itself.

2) If the value really is too low, it should correct itself over time.

3) Participants can always opt to postpone their distribution if their vested balance is more than $5000. If they think the current value is too low, they may be willing to risk deferring payout.

4) Any experienced/reputable ESOP appraiser is very sensitive to influence from management. It would be almost inconceivable for them to reach a conclusion regarding value that they would not feel comfortable defending in court. This process is subjective, so I doubt you could find a "smoking gun."

Despite all of the above, if you have reason to believe that there has been some foul play, the first step would be to contact the DOL's Employee Benefits Security Administration. I don't know that this is true for a fact, but I've been told that if the DOL receives more than two complaints for the same issue for the same plan, they have to investigate. Call them at 1-866-444-3272. Before you do, make sure you have something more concrete. A DOL audit can be a big, costly distraction for management.

[GBurns]

Isn't the value of the ESOP directly determined by the value of the company stock that it holds ?

If that is so, How do you reduce the value of the ESOP without first reducing the value of the stock of the company ?