Reliance Trust Co. is accused by the Labor Department of breaching its fiduciary duties by allegedly causing an employee stock ownership plan to overpay for Tobacco Rag Processors Inc. stock ( Acosta v. Reliance Trust Co., Inc. , E.D.N.C., No. 5:17-cv-00214, complaint filed 5/4/17 ).
Reliance violated the Employee Retirement Income Security Act by failing to properly review the valuation report of Tobacco Rag at the time of the stock sale, the DOL alleged in a lawsuit filed May 4 in federal court in North Carolina. In May 2011, the company's shareholders sold the company stock to the ESOP for $104 million, the lawsuit says. A subsequent valuation showed the company was worth only $13.6 million in December 2011, the lawsuit says.
The lawsuit—the first ERISA lawsuit over ESOP mismanagement filed under Labor Secretary Alexander Acosta—may be a signal that the DOL will continue with its efforts to target trust companies that allegedly cause plans to overpay for company stock. The DOL has been litigating similar cases for some time. Recently, the agency won judgments of $9.5 million against First Bankers Trust Services and $900,000 against California Pacific Bank.
Reliance is also defending a proposed class action over a $100 million deal between Bradford Hammacher Group Inc. and its ESOP.
North Carolina-based Tobacco Rag is a manufacturer and distributor of tobacco products. In 2010, the company retained Willamette Management Advisors as the valuation firm that would determine the feasibility of an ESOP transaction, the lawsuit says.
Later, Reliance said that it would also engage Willamette as its independent appraiser and financial adviser. The Willamette valuation had "numerous flaws which grossly inflated the value" of the company's stock, the lawsuit alleges.
Reliance failed to ensure that the financial information provided to Willamette and used in its valuation was accurate and complete, the DOL says. The trustee also failed to thoroughly understand the appraiser's valuation and meaningfully question the assumptions underlying it, the lawsuit alleges.
The DOL also took issue with Reliance's failure to engage the sellers in rigorous negotiations over the sale price. According to the lawsuit, Reliance's opening counteroffer was only $2 million less ($103 million) than the seller's initial offer ($105 million) and the final price was only $1 million less ($104 million) than the seller's initial offer.
Reliance didn't immediately respond to Bloomberg BNA's request for comment.
The DOL's Office of the Solicitor filed the lawsuit.
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As seen in BNA News, by Carmen Castro-Pagan. Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.