Insurance Company to Pay $3 Million to ESOP for Alleged Share Overpayment

The DOL alleges that the company’s president influenced an appraiser’s valuation and the ESOP’s trustee didn’t do his due diligence before the stock purchase.

The U.S. District Court for the Middle District of Tennessee has approved a settlement between the U.S. Department of Labor (DOL), Zander Group Holdings Inc., its president and its employee stock ownership plan (ESOP) trustee in an Employee Retirement Income Security Act (ERISA) lawsuit.

The DOL says its Employee Benefits Security Administration (EBSA) found in September 2011, the Zander Group Holdings Inc. ESOP paid more than fair market value when it purchased a 49% interest in Zander Insurance, in violation of ERISA. Per the settlement agreement, the defendants will pay $3,818,181 in restitution to the ESOP. The DOL also assessed a civil penalty of $381,818 against the defendants.

According to the DOL’s complaint, Zander Insurance is a partnership which, prior to establishment of the ESOP, was owned by two trusts and JJZ Insurance Agency Inc.

Zander Group Holdings Inc. was created for the purpose of establishing the ESOP. The trustee and the beneficiary to both of the trusts and the president of JJZ Insurance Agency was employed as president of the company. The complaint says in that capacity and as trustee of the Toxaway Trust, he caused the Toxaway Trust to sell its shares of the company to employees who were leased to the company from Zander Insurance, thereby establishing the ESOP.

He retained 2nd Generation Capital to prepare a valuation report and a trustee to represent the ESOP for purposes of negotiating the price of the stock purchase. The DOL alleges that after retaining 2nd Generation, he influenced its findings, and the trustee “caused the employees to overpay for the company’s shares as a result of his failure to meaningfully review the valuation report or engage in an arms-length negotiation prior to agreeing to the stock purchase.”

The DOL claims that the president of Zander Holdings actively influenced 2nd Generation’s conclusion as to value by proffering methodologies through which it could reason to a higher value and by repeatedly stating his desire to obtain a higher conclusion as to value. The agency further claims that the trustee “failed to ensure that the financial information provided to 2nd Generation and used in its valuation was accurate, up-to-date, unbiased, uncorrupted and complete,” as well as “to thoroughly understand the appraiser’s valuation and to meaningfully question the valuation’s underlying assumptions.”

The order instituting the settlement says the defendants neither admit nor deny the allegations.