Under an agreement with the Labor Department to resolve three lawsuits, First Bankers Trust Services Inc. (FBTS) will pay $15.75 million to resolve allegations that it violated ERISA when it approved stock purchases by three Employee Stock Ownership Plans (ESOPs). That monetary relief reflects no penalties assessed under ERISA, however, because they were waived by the Secretary of Labor. FBTS will also reform its procedures for handling ESOP transactions.
In 2012, the DOL filed federal lawsuits against FBTS in the Southern District of New York and the District of New Jersey. The litigation followed investigations by the New York office of the DOL’s Employee Benefits Security Administration (EBSA) into the FBTS decisions to authorize ESOPs sponsored by Maran Inc., Rembar Co. Inc., and SJP Group, Inc., to purchase stock in their respective companies.
Fiduciary duties disregarded. In each of the three cases, FBTS served as a trustee and fiduciary of the ESOP, charged under ERISA with ensuring that the ESOP paid no more than fair market value for the employer stock. In each case, FBTS approved transactions without undertaking the due diligence required of an ERISA fiduciary, and ultimately caused the ESOPs to overpay by millions of dollars for the stock they purchased, according to the DOL.
In the SJP case, following a 17-day trial, the New Jersey federal court held that FBTS breached its duties of prudence and loyalty when it caused the ESOP to overpay for shares of SJP’s stock. In April 2017, there was a two-week trial in the Maran case, but no judgment had been returned as the parties discussed settlement. The Rembar case had been awaiting trial in New York.
Consent orders. Under the consent orders resolving the lawsuits, FBTS will pay $8 million to the SJP ESOP; $6,642,857 to the Maran ESOP; and $1,107,143 to the Rembar ESOP. Although FBTS was also assessed an ERISA penalty in each suit that is equal to 20 percent of the settlement amount, those penalties were waived by the Secretary of Labor.
In the Maran case, FBTS also agreed to follow specific policies and procedures when it acts as a trustee or fiduciary to an ESOP that is purchasing, selling, or considering the purchase or sale of employer securities that are not publicly traded. These policies and procedures include requirements for the selection and oversight of a valuation advisor, the analysis required as part of the fiduciary review process, and the documentation of the valuation analysis.
“These settlements provide not only for reimbursement to these ESOPs and their participants, they commit First Bankers Trust Services to clear procedures to enhance and ensure proper compliance in the future,” said DOL Regional Solicitor of Labor Jeffrey S. Rogoff.
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