Employee Ownership Legal Digest
Corey Rosen (19)

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Corey Rosen

Former ESOP Company Executive Sentenced to Prison for Financial Fraud

In United States v. Lindsey 3:20-cr-00022 (E.D. Va. Feb 18, 2020), a district court convicted Patrick Lindsey, a former vice president of MGT Construction, of financial fraud involving over $20 million and sentenced him to 27 months in prison. The subsequent bankruptcy of MGT and its parent company, Thalheimer, led to a different lawsuit that was settled last year concerning Thalheimer’s ESOP (Brincefield v. Studdard, No. 3:17-cv-00718-JAG (E.D. Va., April 30, 2019).

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Corey Rosen

ESOP Valuation Case Can Proceed

In Scalia v. Reliance Trust et.al., No. 17-cv-4540 SRN-ECW (D.C., Minn., March 2, 2021), a district court rejected motions to provide a partial summary judgment for the plaintiffs or to dismiss the case for defendants. The case involves the alleged overvaluation of shares at Kurt Manufacturing. Defendants include Reliance as well as board members in their capacity to monitor the trustee. The court ruled that only a full trial review of the evidentiary claims could resolve whether a breach of fiduciary duty had occurred.

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Corey Rosen

Plaintiffs Lose Again in Johnson & Johnson Case

In Perrone v. Johnson & Johnson, No. 3:19-cv-00923, (D. N.J., Feb. 26, 2021), a district court rejected a lawsuit alleging that Johnson & Johnson executives breached their fiduciary duties when they did not reveal problems with its talcum powder that were linked to cancer cases. Plaintiffs argued that the defendants “could have directed the Plans to hold incoming ESOP assets in cash until Johnson & Johnson stock was no longer artificially inflated.” The court ruled, however, that such an action arguably would have required disclosure and could have harmed the stock price. Plaintiffs also argued that by incorporating J&J’s securities filings “into plan-related documents,” such as the Summary Plan Description, corrective disclosures are now both corporate and fiduciary acts. The court disagreed, saying that the individuals involved had to pay attention to their “two hats” and that issuing a corrective securities disclosure was purely a corporate act, not a fiduciary requirement. Finally, the court said the plaintiff’s alternative course of action could not have been shown to do more good than harm.

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Corey Rosen

IRS Seeks Comments on Form 5309 ESOP Determination Letter Request

As part of a program to reduce federal paperwork requirements, the IRS is asking for comments on Form 5309, Application for Determination of Employee Stock Ownership Plan. Comments are dues by April 21. Direct all written comments to Kinna Brewington, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224.

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Corey Rosen

GreatBanc Case Can Proceed

In Godfrey v. GreatBanc et. al., No. 18 C 7918 (N.D. Ill., Feb. 21, 2021), a district court certified a class action lawsuit in an ESOP case at McBride and Sons involving a 2013 reorganization that reduced the ESOP’s ownership from 100% to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. Plaintiffs allege that the reorganization deprived them of distribution rights and gave them shares with fewer control rights. Defendants argued that some of the plaintiffs lacked standing because they were not harmed by the transaction, including employees who may not have held stock at the time of the proposed transaction.

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Corey Rosen

Request for Arbitration of ESOP Lawsuit Denied

In Hensiek et.al, vs Board of Directors of Casino Queen Holding Company, Inc., et.al, No. 3:20-CV-377-DWD (7th Cir. January 25, 2021), the Seventh Circuit denied a request by the defendants in an ESOP case to compel arbitration over claims of a fiduciary breach related to the valuation of Casino Queen stock. The plan did not contain an arbitration clause initially, but in 2017 was amended to require arbitration over benefits claims. The plaintiffs said the change was unilateral and could not be binding. The Seventh Circuit agreed, saying that arbitration clauses are only valid if 1) both parties agree, 2) those claiming a benefit have not received any benefit they would not have had otherwise had there not been an arbitration clause, and 3) continued employment and/or the right to receive benefits from the ESOP do not imply a required acceptance of arbitration. The court focused particularly on the issue of the plaintiff not receiving consideration, writing that “consideration is a prerequisite to the validity of a proposed agreement or modification of an existing agreement. Consideration exists only if there is a grant of an advantage or the bargained for acceptance of a disadvantage.” The court ruled the plaintiff received no such advantage. The rulings were pursuant to Illinois law concerning arbitration but given the similarity of state laws on these issues suggest that at least in the Seventh Circuit, arbitration clauses would only apply in certain cases. The case was remanded to the district court, which affirmed that the plaintiffs can proceed with their case and not be subject to the arbitration clause.

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Corey Rosen

Raydon Settlement Denied:

In Woznicki v. Raydon, No: 6:18-cv-2090-Orl-78GJK (M.D. Fl., Feb. 17, 2021), a district court denied approval of a $2.4 million settlement with Lubbock National Bank in a $60.5 million lawsuit over an ESOP at Raydon Corporation. The stock price of the company declined about 12% in the following two years. The court said two of the class participants are not entitled to $10,000 under the settlement.

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Corey Rosen

GE Wins Stock Drop Litigation Appeal

In Varga v. General Electric, No. 1:18-cv-01449-GLS-DJS (2nd Cir., Feb. 4, 2021), the Second Circuit affirmed a lower court ruling that the plaintiff did not show plausible alternative courses of actions that would have done more harm than good with respect to the drop in the value of GE stock in the company’s 401(k) plan. The lawsuit was based on GE’s inaccurate claims about reserves for insurance companies it owned, which ultimately caused the stock price to fall. But the court ruled that despite this, the plaintiff did not show that disclosure of the problem or removing the stock as an option would have done more good than harm, thus not meeting the Dudenhoeffer standard.

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Corey Rosen

Court Permits ESOP Valuation Case to Proceed

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK (C.D. Cal. Jan. 15, 2021), a district court allowed employees of KPC Healthcare to proceed with their lawsuit over an alleged overvaluation of the shares their ESOP purchased. The ESOP bought 100% of KPC Healthcare in a 2015 transaction. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was 9 to 15 times higher than the price of company shares on a public market just two years before, when the company went private. The company had declining revenues during those two years, and the stock price fell after the transaction. Alerus said the complaint alleged no specific facts about its fiduciary process, but the court ruled that information and belief were sufficient at this stage of pleading to allow the case to proceed. Company defendants asked for dismissal on the grounds that their job was to appoint an independent trustee, but the court ruled their duty to monitor made them potentially liable in the transaction as well. Third, the court refused to dismiss claims against the former owner, Kali Pradip Chaudhuri, on the grounds that he knew the price he was receiving might be excessive and thus could be deemed a fiduciary. Finally, the court denied a motion to dismiss a claim that participants as plaintiffs should have been able to see the valuation report. The court’s language, if a trial court agrees, could imply that participants in any ESOP have a right to see the report.

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Corey Rosen

GreatBanc Can’t Use Release to Avoid Fiduciary Litigation

In McMaken v. GreatBanc Tr. Co., No. 1:17-cv-04983 (N.D. Ill., Aug. 21, 2019) a district court ruled that GreatBanc cannot use a release signed by the plaintiff Michael McMaken from claims against Chemonics or any of its fiduciaries when he left the ESOP-owned firm Chemonics. The court ruled that GreatBanc was a fiduciary for the ESOP trust and its reading of the release was too broad. GreatBanc had contended that its status as a fiduciary included being a fiduciary to the company.

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