Employee Ownership Legal Digest
Corey Rosen (12)

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NCEO founder and senior staff member

Corey Rosen

December 13, 2022

Stout Risius Must Pay Fiduciary Insurer

In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc. et al., No. 2:19-cv-11294 (E.D. Mi, Nov. 1, 2022), a district court ruled the ESOP valuation firm Stout Risius must pay $60,000 in costs the company argued should have been covered by its insurer, Great American Fidelity Insurance Company. Great American had claimed it did not have to defend or indemnify the ESOP appraisal firm Stout Risius Ross over allegations about its valuation work for Appvion, an ESOP company that went bankrupt. All the federal claims under ERISA have been dismissed in the case, but state securities laws claims are still being litigated. Great American claims it is not liable because of an exclusion clause it claims exempts it if the defendant can be shown to have violated ERISA or securities laws.

Corey Rosen

November 16, 2022

Court Orders $540,000 to be Restored to ESOP in Case Where Seller Acted as Trustee

In Walsh v. Robert N. Preston, TPP Holdings, No. 1:14-cv-04122-ELR (N.D. Ga., Sept. 20, 2022), a court ordered TPP Holdings and former owner Robert Preston to restore $540,000 to the ESOP over an alleged overvaluation of shares the plan bought in 2006 and 2008, as well as other violations. Preston acted as both the trustee and the seller in the plan. The ESOP paid $6 million in the transactions. Two years after the final transaction, the stock was worthless. The DOL alleged that the valuation was flawed and based on excessively optimistic projections. The DOL also alleged that the company failed to make required distributions to the ESOP, allocated fewer shares to the plan than required, commingled company and plan assets, and failed to make required distributions to terminated participants.

Corey Rosen

November 16, 2022

Alerus agrees to $4 million settlement in KPC case

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-V-01126-SB-SHK (C.D. Cal. Oct. 10, 2022), Alerus agreed to a $4 million settlement with KPC Healthcare in an ERISA valuation case. As we detailed in the October 2022 issue of this newsletter, litigants had already secured $5 million from other defendants in the case. Plaintiffs alleged the stock price the ESOP paid was too high because it was nine to 15 times higher than the price of company shares on the public market just two years before.

Corey Rosen

November 16, 2022

ISCO plaintiffs must arbitrate their claims

In Best et al v. James., No. 320-cv-299-JRW (W.D. Ky., Sept. 22, 2022) a court ruled that plaintiffs must agree to arbitrate their claims against executives of ISCO Industries concerning the buyback of company shares from the ESOP. In a prior 2019 decision, Swain v. Wilmington Trust N.A., a federal judge approved a $5 million settlement with a class of employees at ISCO Industries who alleged the ESOP had overpaid for the shares. The settlement amounted to about $12,000 per employee, minus legal fees and taxes. The ESOP paid $98 million for the shares with a note from the sellers at a 2.4% annual rate over 25 years. Post-leverage, the shares were revalued at $39 million. In settling, Wilmington denied it had done anything improper.

Corey Rosen

November 16, 2022

Aetna, CVS defeat claim in suit over stock price drop in 401(k) plan after merger

In Radcliffe v. Aetna, Inc., 3:20-cv-01274-VAB (D. Conn. Sep. 30, 2022), CVS and Aetna defeated a claim that the defendants acted imprudently in not disclosing information about the financial risks facing CVS that emerged after the merger. CVS acquired Aetna in 2018. Aetna employees had been able to invest in Aetna stock in their 401(k) plans. With the merger, Aetna shares became CVS shares. CVS stock fell sharply after it disclosed that its acquisition of Omnicare, a long-term health provider, required CVS to take a $2.2 billion goodwill impairment because of financial issues at Omnicare. CVS was also facing litigation (which it ultimately lost) over its prescription pricing policies with hospitals. The plaintiffs argued that information about the impairment and litigation should have been provided to them. The court ruled that the defendants were not fiduciaries, having delegated that authority to a committee that was not the subject of the litigation. More important, the court found that the defendants cannot be held responsible for the choice to move Aetna shares into CVS shares because the allegations made concerned events that only hindsight could show would affect stock price.

Corey Rosen

November 16, 2022

State court upholds sale to ESOP

In Eichhoff et. al. v. New Glarus Brewing (WI, No. 2021CV002011 (Cir. Ct., Dane County, Oct. 6, 2022), a Wisconsin court dismissed a lawsuit against ESOP-owned New Glarus Brewing over the price three of its early investors got when they sold their stock after the ESOP was formed.

Corey Rosen

October 05, 2022

Johnson & Johnson Prevails in Stock Drop Suit

In Perrone v. Johnson & Johnson, No. 21-1885 (3d Cir. Sept. 7, 2022) the Third Circuit ruled that the trustees of Johnson & Johnson’s 401(k) plan could reasonably argue that to remove Johnson & Johnson stock from the plan’s investment options in light of litigation over asbestos in its talcum powder could arguably have “done more harm than good” and thus were not obligated to make changes under the doctrine of the Dudenhoeffer decision.

Corey Rosen

October 05, 2022

Settlement Reached in Maine Oxy Case:

In Walsh v. Maine Oxy Acetylene Supply, No. 2:20- incv-00326-NT (D. Me. Aug. 26, 2022), parties reached a $6.5 million settlement in a case in which plaintiffs contended that the ESOP trustee and the CEO of the company terminated an ESOP at an improperly low price to orchestrate a favorable deal for members of the board to buy back the 49% of the company the ESOP then owned.

Corey Rosen

October 05, 2022

Court Says Trustee in ESOP Case Can Compel Arbitration

In Robertson v. Argent Trust Company, No. 21-cv-01711-PHX-DWL, 2022 WL 2967710 (D. Ariz. July 27, 2022) a district court ruled that Isagenix could enforce a mandatory arbitration clause concerning its ESOP. Courts have recently come to mixed conclusions on this issue. Robertson alleged that the ESOP had overpaid for shares in Isagenix, particularly in light of deteriorating financials. The plaintiff had based her arguments primarily under Arizona law, which prohibits arbitration clauses that are “unconscionable” limits on the right to pursue claims in court. The court ruled that ERISA trumps state law in this matter, however.

Corey Rosen

October 05, 2022

DOL and GreatBanc Reach Settlement in Wells Fargo Stock Case

The Department of Labor has reached a $145 million settlement over an investigation in which the DOL alleged that the company’s 401(k) plan paid between $1,033 and $1,090 per share from 2013 to 2018 for Wells Fargo preferred stock. The plan bought preferred shares created just for the plan that converted to $1,000 in Wells Fargo common stock when allocated to participants. The plan borrowed money from Wells Fargo to purchase the preferred stock. Dividends on the shares were used to repay the loan, and then were counted toward the company’s obligations to match employees’ 401(k) deferrals. The DOL believed the plan was set up in a way that employees would receive shares that were less than the value the plan paid for them. A total of $13.2 million of the settlement will be paid as a penalty to the DOL and the rest to participants. Wells Fargo will also redeem preferred shares still held by the plan and exchange them for common stock. GreatBanc is not part of the financial settlement.

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