Reliance Trust Settles DOL Lawsuit Over ESOP Valuation

The lawsuit alleged that employee stock ownership plan participants overpaid for company stock.

The U.S. District Court for the Eastern District of North Carolina has signed a consent judgment approving a settlement between the Department of Labor (DOL) and Reliance Trust Co. Inc. involving the Tobacco Rag Processors Inc. Employee Stock Ownership Plan (ESOP).

The consent judgment requires Reliance Trust to pay $4,545,454 back to the plan within 30 days. Once the payment is made, the Department will assess a civil penalty of $454,545 against Reliance Trust Co. Inc.  

Investigators in the DOL’s Employee Benefits Security Administration (EBSA) found that, in May 2011, the owners of Tobacco Rag Processors Inc. sold 100% of the company stock to the plan for $82.5 million, purportedly for the benefit of the employees. The EBSA determined the sales price of the company’s stock exceeded fair market value and that Reliance Trust Co. Inc., as plan trustee, did not determine the sales price in good faith.

The agency alleged that Reliance Trust failed to ensure that the financial information provided to the appraiser and used in its valuation was accurate and complete. In addition, it charged that Reliance Trust failed to thoroughly understand the appraiser’s valuation and failed to meaningfully question the assumptions underlying the valuation. As a result, according to the lawsuit, the plan overpaid for the company stock, causing losses to the plan.

Under the terms of the consent judgment, Reliance Trust may not seek direct or indirect contribution or indemnification from Tobacco Rag Processors Inc. or the plan either to pay the judgment or to pay its legal expenses.