Compliance

DOL Says Overvaluing Stock Led to ESOP Losses

October 2, 2012 (PLANSPONSOR.com) – The U.S. Department of Labor (DOL) filed a lawsuit against GreatBanc Trust Co. and Sierra Aluminum Co., alleging that stock overvaluations led to losses for Employee Stock Ownership Plan (ESOP) participants.

By Kristen Heinzinger editors@plansponsor.com | October 02, 2012

Based on an investigation by the Employee Benefits Security Administration (EBSA), the suit alleges that GreatBanc breached its fiduciary duties to the Sierra Aluminum ESOP when it allowed the plan to pay more than fair market value for employer stock in June 2006.

Sierra Aluminum, the ESOP’s sponsor, was named a defendant for entering into an indemnification agreement with GreatBanc that violates the Employee Retirement Income Security Act (ERISA). The plan currently has 322 participants.

EBSA claims that GreatBanc failed to adequately inquire into an appraiser’s report that presented unrealistic and aggressively optimistic projections of Sierra Aluminum’s future earnings and profitability. GreatBanc allegedly failed to investigate the credibility of the assumptions, factual bases and adjustments to financial statements that the appraiser relied on in preparing its report. The suit also alleges that GreatBanc asked the appraiser to revise its valuation opinion in order to reconcile the ESOP’s higher purchase price with the lower fair market value of the company stock.

Sierra Aluminum’s indemnification agreement with GreatBanc violated ERISA to the extent that it would permit them to pay GreatBanc’s losses, costs, expenses and damages unless and until a court enters an unappealable judgment that GreatBanc did not violate ERISA.

The complaint seeks to restore losses plus interest to the plan and to enjoin Sierra Aluminum from indemnifying GreatBanc.

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