Employee Ownership Legal Digest
Corey Rosen (6)

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Corey Rosen

ESOP Radiology Company Settles Lawsuit

In a second radiology company case, Colon v. Johnson, No. 8:22-cv-00888-TPB-TGW (Mar. 28, 2024), a $19 million settlement was reached concerning alleged diversion of assets in an ESOP company. Plaintiffs sued the executives and the trustee, GreatBanc Trust, alleging that the executives and former owners of Advanced Diagnostic (ADG) had deprived the ESOP of value by diverting contracts from ADG to other companies they owned, structuring the deal with an excessive amount of warrants (42% of the fully diluted value), and ultimately selling ADG in a transaction that excessively favored the executives and owners. Plaintiffs alleged the defendants at ADG set up shell companies to acquire a valuable management contract for multiple imaging centers, even though ADG performed all of the work under a subcontract. In 2019, ADG was sold for $215 million, with the ESOP receiving only $10 million of that, partly due to the exercise of warrants and partly due to the ESOP paying off remaining acquisition loan debt. Plaintiffs also alleged, however, that much of the sale value was captured by the other entities the defendants had set up that were sold simultaneously, value the plaintiffs claim should have gone to the ESOP. The settlement will be divided among 285 plan participants.

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Corey Rosen

Court Rules Arbitration Clause Does Not Apply in A360 ESOP Termination Lawsuit

In Williams v. Shapiro, No. 1:23-cv-03236-VMC (Mar. 20, 2024), plaintiffs allege that an ESOP set up at their company, A360, was improperly terminated, preventing them from reaping potentially very large gains on their unallocated stock. In 2017, A360 was spun off from a law firm to perform support services for law firms. A leveraged ESOP bought all of the shares. The market for such services soared in the next two years. The sellers, who remained in control of the company, decided to terminate the plan and buy back the shares in order to take advantage of the hot market. Sellers bought back the allocated shares at the most recent valuation, but plaintiffs allege the unallocated shares (the large majority of the shares at that point) were bought back at the purchase price, not the most recent sale price, thus depriving the participants of the appreciation on unallocated shares.

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Corey Rosen

ESOP Valuation Case Against Envision Radiology Can Proceed

In Harrison v. Envision Management Holding Company, No. 22-1098 (D. Colo. Mar. 21, 2024), a district court said that plaintiffs had pleaded sufficient allegations to allow a case concerning the price paid by an ESOP for Envision Radiology to continue. Envision was sold to an ESOP in 2017. The ESOP paid $163.7 million to the sellers. Plaintiffs allege the ESOP paid $1,770 per share for 64% of the Envision shares and $1,404 per share for 36% of the Envision shares, but that there was no reason for the discrepancy. The defendants argued this was incorrect. The stock dropped to $349 after the transaction (the deal was financed with debt, so the stock price would normally decline). The judge ruled that at this stage, there were voluminous filings to review, and that it was premature to dismiss the case.

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Corey Rosen

Former CEO and Owner of ESOP Company Sentenced to Prison for Fraud

In USA v. Corl et al., Docket No. 5:18-cr-00576 (N.D. Cal. Mar. 19, 2024), Harry Corl, former owner and CEO of Nu-Metal Finishing, was sentenced to serve 30 months in prison and pay $253,625 in restitution to 30 former employees of a company he and his wife had partially owned. The Corls sold part of the company to the ESOP, while the other part was owned by a separate owner. The Corls also served as plan fiduciaries. Corl and his wife were convicted of wire fraud and embezzlement, including spending company funds on extravagant jewelry and a Ferrari. The Corls arranged the sale of Nu-Metal, but they did not tell the buyer that there was an ESOP or another owner. The sentencing follows a four-year investigation by the Department of Labor.

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Corey Rosen

Plaintiff Must Arbitrate ESOP Claim

In Harris v. Paredes, No. 3:23-cv-50231 (N.D. Ill. Feb. 26, 2024), a district court ruled that an arbitration in a plaintiff in an ESOP valuation lawsuit requires the plaintiff to pursue arbitration. The clause was written so that it would not apply if the issue was an ERISA violation subject to a class action but was instead focused on the claims of an individual. The court agreed with the plaintiff that arbitration claims cannot vitiate the rights of a plaintiff to sue for equitable or monetary relief on behalf of the plan but agreed with the defendants that the clause does not as written do that. It therefore ruled that “to the extent that Harris brings section 502(a)(2) claims that are to be pursued solely by her on behalf of the Plan—that is, in her ‘individual capacity’ within the meaning of the arbitration agreement—arbitrating them is compulsory. To the extent that Harris purports to bring claims on behalf of a class under section 502(a)(2), the Plan has validly agreed to waive that right, and she may not pursue them in arbitration.”

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Corey Rosen

Casino Queen Employees Cannot Be Certified as Class in ESOP Valuation Suit

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., No. 3:20-CV-377-DWD (S.D. Ill. Feb. 26, 2024), a federal judge denied class certification in a long-running dispute over the valuation of shares in the sale of Casino Queen to an ESOP in 2012. Plaintiffs allege the ESOP’s 2012 purchase of the company for $170 million was based on excessively optimistic projections. They also allege the company sold and then leased back real property it owned for too low a price and that the two trustees for the deal were insiders with conflicts of interest and subject to direction from the board and ESOP administrative committee. The court said the actions in question occurred at different times over three years and affected participants in the suit in different ways. Of special concern was that some of the complaints are subject to a tolling limitation that can only be overcome by showing that fraud and concealment prevented plaintiffs from knowing an abuse had occurred. In this case, different members of the proposed class were not involved in the ESOP at the time of the alleged violations. The court agreed with the defense that the proposed class “includes a large subset of participants who cannot rely on the FAC’s concealment exceptions to toll ERISA’s six-year limitations period.” As a result, the court ruled the plaintiffs can only proceed individually.

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Corey Rosen

Case Over Valuation of Terminated ESOP Shares Can Continue

In Bowers, et al. v. Russell, et al. No. 22-10457 (D. Mass., Feb. 15, 2024), a district court allowed plaintiffs to continue their case against the defendants in a valuation and release of claims dispute. Russelectric became a 30% ESOP in 2010. In 2013, the founder died, and ensuing disputes between the family members and an ex-wife over probate resulted in a settlement that led to terminating the ESOP in 2016. As part of the termination, shares in the suspense account were sold back to the company, and employees received the remaining value after the loan was paid on the unallocated shares. For the allocated shares, employees were paid $134 per share plus an agreement that participants would be paid the difference between $134 and any price paid for any sale of the company should one take place over the next three years. That sale did occur in 2019 for $676 per share.

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Corey Rosen

Wells Fargo KSOP Litigation Settled

In Randall et al v. Greatbanc Trust Company et al., No. 0:2022cv02354 (D. Minn. Nov. 13, 2025), the parties reached an $84 million settlement in a case concerning the use of dividends on preferred shares in a 401(k)/ESOP at Wells Fargo. Wells Fargo previously reached a settlement with the DOL on the plan, but the court allowed an amended complaint from these plaintiffs to continue. Wells Fargo matched employer contributions to the 401(k) plan at 6% per year. The match could be made on shares released to participants in the ESOP from the suspense account. Wells Fargo used preferred stock in the plan, and used the dividends on the shares to help repay the ESOP loan and meet the match requirement. Plaintiffs allege the preferred stock was undervalued and that the use of the dividends to repay the loan did not benefit the participants. GreatBanc and the company officer defendants argued that “[t]here is nothing inherently suspicious, much less unlawful, about using dividends paid on stock held by an ESOP to pay down the sponsoring company’s loan to its ESOP, and then using the shares generated by the paydown of the loan to satisfy corporate matching obligations.” In 2022, Wells Fargo reached a $145 million settlement over how much the 401(k) paid for the company's shares.

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Corey Rosen

Electric Supply Company of Tampa ESOP Litigation Settled

In Cothran v. Adams, No. 8:23-cv-00518-CEH-CPT (M.D. Fl. Feb. 16, 2024), a settlement has been reached in another case of an ESOP termination. In 2011, Electric Supply (ESI) set up a non-leveraged ESOP with the intention of the ESOP becoming the majority owner over time. After some years, the family owners decided to stop buying shares, although they continued to put in cash.

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Corey Rosen

Valuation Case Against B-K Lighting Can Continue

In Chea v. Lite Star ESOP Committee, No. 1:23-cv-00647-JLT-SAB (E.D. Cal., Jan. 25, 2025), a magistrate court ruled that a lawsuit over the valuation of shares sold to an ESOP at B-K Lighting was overstated, largely because of allegedly excessively optimistic forecasts and because the ESOP paid for control it did not functionally have. The plaintiffs did not actually see the valuation, and defendants argue they suffered no harm from the transaction and had no factual basis for the allegations, but the judge ruled that at this stage, it was too early to dismiss the claims. The judge made a similar ruling as to whether the sellers and executives, not just the independent trustee, could be parties to the suit. The court also ruled that nontrustee defendants could have exercised some degree of control over the valuation through their financial projections and other actions and thus could not be dismissed from the case at this point.

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