ESOP Consultant Not an ERISA Fiduciary

January 3, 2003 ( - A financial consultant that appraised the company stock of an Illinois direct marketing firm can't be held responsible for the firm's ESOP losses because the consultant wasn't an ERISA fiduciary, a judge ruled.

US District Judge Michael Mihm of the US District Court for the Central District of Illinois ruled that consulting firm Valuemetrics Advisors Inc. was not an ERISA  fiduciary even though it had provided yearly stock evaluations for the  Employee Stock Ownership Plan (ESOP)  for a number of years, Washington-based legal publisher BNA reported.

Mihm rejected an argument that the consultant’s stock evaluations constituted investment advice, which gave the consultant fiduciary responsibilities.

“[T]he Department of Labor has issued an advisory opinion indicating that appraising the value of closely-held stock for an ESOP does not constitute the rendering of investment advice within the meaning of” ERISA, the court noted. Mihm’s ruling came in a lawsuit filed by two ESOP participants against the marketing firm and others.

Mihm said in his ruling that the stock appraisals were actually performed on behalf of F&G’s board of directors, not the ESOP.

An ESOP Recapitalization

According to the BNA story,Foster & Gallagher Inc. (F&G), a direct marketing firm, established an ESOP In 1988. In 1995, the company’s board of directors decided to recapitalize the ESOP. After the recapitalization was approved, the ESOP used the proceeds of a $70-million loan to purchase nearly 3.6 million F&G shares.

From 1988 through 2001, Valuemetrics Advisors Inc. performed appraisals of F&G stock. According to the court, Valuemetrics never was named as a fiduciary or as an investment manager of the ESOP, nor was Valuemetrics involved in the administration of the ESOP.

In the years following the ESOP recapitalization, several states brought investigations against F&G’s subsidiary, Michigan Bulb Corp., surrounding the company’s sweepstakes promotions.  While Michigan Bulb and F&G settled most of the lawsuits brought by the states, Michigan Bulb’s revenue declined from $197 million in 1998 to $65 million in 2000. F&G’s gross revenues dropped from $471 million in 1998 to $337 million in 2000.

As a result of the Michigan Bulb investigations, the value of the ESOP’s F&G shares dropped from $20 per share to just under $9 per share. In addition, the total value of the F&G shares owned by the ESOP decreased more than 90% from a net value of more than $82 million in 1997 to a net value of just over $7 million in 1998.

Two plan participants sued F&G and its board of directors, the ESOP’s trustee, US Trust Co., the ESOP’s administrative committee, and Valuemetrics alleging they breached their ERISA fiduciary duties by entering the 1995 ESOP transaction.

The case is Keach v. U.S. Trust Co. N.A ., C.D. Ill., No. 01-1168, 12/30/02.