Employee Ownership Legal Digest (20) Archive

Stay informed on the latest legal developments impacting employee ownership. This page provides timely and concise summaries of key cases and rulings, contributed by experienced attorneys, to help the entire employee ownership community understand their implications, and also offers access to NCEO's archive of prior content.

Corey Rosen

Wilmington Trust Can Proceed on One Claim Against Valuation Firm

Wilmington Tr., N.A. v. Stout Risius Ross, Inc., No. 20 Civ. 2505 (S.D. NY, March 23, 2021). The lawsuit revolves around Stout’s role as the appraiser in Brundle v. Wilmington Trust, No. 17-1873 (4th Cir., March 21, 2019), which ended up in a $29.8 million judgment against Wilmington Trust over its role in the ESOP at Constellis. Wilmington sued Stout for breach of contract, negligence, and contribution over its decisions as the appraiser in the case. 

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Corey Rosen

Edison wins stock drop case

In Wilson v. Craver, No. 18-56139 (9th Cir, April 19, 2021), the 9th Circuit Court upheld a lower court ruling that the plaintiff did not state a plausible course of alternative action Edison Electric executives could have taken that would have done more good than harm in a case involving a drop in Edison’s stock value in the company’s ESOP.

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Corey Rosen

Settlement Terms in IBM Case Revealed

Settlement terms in the long-running stock-drop case Retirement Plans Committee of IBM v. Jander et al., No. 18-165 (U.S., Jan. 14, 2020) have been revealed. IBM admitted no wrongdoing and the plaintiffs agreed to release all future claims. IBM agreed to pay $4.75 million into a qualified settlement fund. The funds will be distributed by an independent administrator among the IBM ESOP participants and beneficiaries and plaintiff attorneys.

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Corey Rosen

Court Allows Insurer to Proceed with Claims It Does Not Have to Defend or Indemnify ESOP Appraisal Firm

In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc. et al, No. 2:19-cv-11294 (E.D. Mi, March 4, 2021), a district court allowed Great American Insurance Company to proceed with claims it does 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 of the federal claims under ERISA have been dismissed in the case, but state securities laws claims are still being litigated.   

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Corey Rosen

Starkey ESOP Case Settled

In Beck v. Austin, No. 19-CV-1453 (D.C., Minn., March 12, 2021), a court approved a $173,000 settlement against various defendants, including the CEO, of Starkey Laboratories, a hearing aid manufacturer. Defendants were accused of fraud against the company between at least 2006 and 2015, siphoning off $30 million in cash and harming the ESOP through the issuance of restricted stock to themselves, dramatically reducing the ESOP’s ownership of the company. Starkey hired an outside trustee to help reach an initial settlement agreement, which eventually paid the ESOP $800,000. Defendants claimed that released them from all claims, but the court allowed further litigation to resolve other issues, which this settlement resolved. Starkey has about 4,000 employees.

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Corey Rosen

Mixed Decision in ESOP Valuation Case

In Stewart v. Saakvitne, No. 18-00155 SOM-WRP, (D. Haw., March 12, 2021), a district court denied summary judgment to former members of the board of directors of an ESOP firm, Bowers + Kubota, over an ESOP valuation case. The court also denied a DOL claim that the two individuals could be considered plan fiduciaries prior to their formally adopting a decision to proceed with the plan and hire an outside fiduciary (that fiduciary has since deceased). The court also denied a DOL claim concerning the validity of an indemnification provision for the board members because the DOL did not show they actually benefitted from it. Finally, the court ruled that the directors could be held accountable as fiduciaries if at trial they are shown to have inadequately monitored or improperly influenced the trustee concerning the valuation.  

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Corey Rosen

Class Status Approved in ESOP Refinancing Case

In Gamache v. Hogue, No. 1:19-CV-21, (M.D. Ga. March 3, 2021), a court certified class to allowed plaintiffs to proceed with a lawsuit alleging that a refinancing of a 97% ESOP that resulted in the two principals of the firm ending up with 40% of the shares was a violation. Defendants argued this was a corporate transaction, not an ESOP transaction, among other contentions.

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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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