By Pension and Benefits Editorial Staff
In unrelated developments, the Labor Department announced a settlement agreement under which a Georgia company will return $4.5 million to an employee stock ownership plan after an excessively valued company stock sale, and a move to add additional defendants and claims in litigation to recover $50 million in unpaid participant health benefit claims from a multiple employer welfare arrangement.
Consent judgment. Under a North Carolina federal court consent judgment, Reliance Trust Co. Inc. will pay $4,545,454 back to the Tobacco Rag Processors Inc. Employee Stock Ownership Plan, according to the DOL. Once the payment is made, the DOL will assess a civil penalty of $454,545 against the Atlanta, Georgia, company.
Overpriced stock sale. DOL Employee Benefits Security Administration investigators found that in May 2011, the owners of Tobacco Rag Processors Inc. sold 100 percent of the company stock to the plan for $82.5 million, purportedly for the benefit of the employees. But EBSA determined that the sales price of the company's stock exceeded fair market value and that Reliance Trust, as plan trustee, did not determine the sales price in good faith. Reliance Trust failed to ensure that the financial information provided to the appraiser and used in its valuation was accurate and complete. Reliance Trust also failed to thoroughly understand the appraiser's valuation and to meaningfully question the assumptions underlying the valuation. As a result of Reliance Trust’s disregard of its fiduciary responsibilities, the plan overpaid for the stock, causing plan losses.
The Secretary of Labor filed a complaint against Reliance Trust in May 2017.
No contribution or indemnification. In addition to the monetary payment, under the terms of the consent judgment entered in the case, Reliance Trust is prohibited from seeking direct or indirect contribution or indemnification from Tobacco Rag Processors Inc., or the plan, either to pay the judgment or to pay its legal expenses.
Expanding MEWA litigation. In an unrelated development, the DOL has filed a motion to amend its complaint, filed in federal court in Illinois, requesting leave to include additional defendants and claims in an action seeking more than $50 million in unpaid participant health benefit claims in the AEU Holdings LLC Employee Benefit Plan.
The amended complaint seeks to add as defendants the owner of Black Wolf Consulting Inc.; two owners of AEU Holdings LLC; Veritas PEO LLC and Veritas Benefits LLC and two owners; and Wilson Benefits Services LLC and WBS LLC and its owner.
The plan is a MEWA, formerly operated by the existing defendants, AEU Benefits LLC, AEU Holdings LLC, and Black Wolf Consulting Inc, according to the DOL. In November 2017, the federal agency filed its original complaint after an EBSA investigation found that the defendants violated ERISA when they failed to pay health benefit claims.
Unpaid claims. At its height, the MEWA provided health and welfare benefits to employer-sponsored ERISA-covered plans covering about 14,000 participants and beneficiaries who worked for more than 560 employers in 36 states. Numerous participants alerted EBSA of the MEWA's serious failure to pay medical claims. As of September 2018, the MEWA had more than $50 million in processed but unpaid claims for medical services that participants had received as far back as January 2016.
Additional defendants and claims. The DOL’s motion asks the court order to AEU Holdings LLC, Black Wolf Consulting Inc., Veritas, and the defendant owners to restore losses to the MEWA and participating plans caused by their fiduciary breaches, and to disgorge all profits and fees. The motion also asks the court to bar them from serving as fiduciaries or service providers to any ERISA-covered plan. Wilson Benefits Services LLC, WBS LLC, and their owner allegedly knowingly participated in these violations and should similarly be required to disgorge all profits and fees, the DOL contends.
Investigation. EBSA investigators in Chicago and Florida found that contributions received from the participating plans were pooled in two offshore accounts in Bermuda as part of the MEWA for purposes of paying claims. However, these contributions were also used to pay excessive, undisclosed fees and expenses to the defendants, other service providers, and re-insurance providers, investigators found. AEU Holdings LLC allegedly continued to pay these excessive fees despite the MEWA's inability to pay for millions in pending health claims.
EBSA's investigation also found Black Wolf Consulting Inc., its owner, Veritas Benefits LLC, and its owners used plan assets for their own business and personal use, transferring over $6.5 million from the Veritas Benefits LLC and Black Wolf Consulting Inc. benefits accounts to their own accounts. These companies and their owners also purportedly marked up the MEWA's contribution rates for their own benefit and Veritas received additional administrative fees from AEU Holdings LLC.
TRO granted earlier. The litigation commenced in 2017, when the DOL filed a request for a temporary restraining order. The court granted that request and immediately appointed an independent fiduciary to oversee the MEWA's operations; marshal and control the MEWA's assets related to the underlying participant plans; and perform an accounting of the MEWA's financial position. The order also instructed the fiduciary to terminate the MEWA and determine the MEWA's ability to pay outstanding participant health claims. The independent fiduciary continues to work to negotiate and pay outstanding health claims.
Cease and desist order. The DOL also exercised its authority to issue a cease and desist order preventing sub-brokers and aggregators working on the MEWA's behalf from marketing it to prospective employers or from enrolling new employers. The Secretary of Labor has the authority to issue an ex parte cease and desist order to a MEWA whenever the Secretary finds reasonable cause to believe, among other things, that the respondent(s) engaged in conduct that creates an immediate danger to public safety or welfare.
The DOL filed its lawsuit in the Northern District of Illinois; the case is No. 1:17-cv-07931-JHL-SMF.
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