On June 2, 2014 the U.S. Department of Labor (DOL) reached a $5.25 million settlement with GreatBanc Trust Company (GreatBanc). It was alleged that GreatBanc, as trustee to the Sierra Aluminum Company Employee Stock Ownership Plan (ESOP), allowed the plan to purchase stock from Sierra Aluminum’s co-founders and top executives for more than fair market value. The DOL alleged that GreatBanc failed to adequately inquire into an appraisal that presented unrealistic and aggressively optimistic projections of Sierra Aluminum’s future earnings and profitability. They also allegedly failed to investigate the credibility of the assumptions, factual bases and adjustments to financial statements that went into the appraisal. GreatBanc and its insurers will make $4.77 million in payments to the ESOP and $0.48 million in civil penalties. Additionally, the Company has agreed to follow certain policies and procedures whenever the Company is a trustee or fiduciary to an ESOP that is engaging in transactions involving the purchase or sale of employer securities that are not publicly traded. This includes selection and oversight of the valuation appraiser, analysis and review required on the part of the trustee, and required documentation related to the valuation. Phyllis C. Borzi, Assistant Secretary of Labor for Employee Benefits Security, is quoted saying “Others in the industry would do well to take notice of the protections put in place by this agreement. ESOPs are an important tool to promote employee ownership, not a way to create big cash-outs for owners and top executives.” While these policies and procedures in place for GreatBanc go beyond what the law currently requires, they can give other trustees of ESOPs an idea of what is important to the DOL and potentially avoid DOL scrutiny in the future.
Sources: U.S. Department of Labor, Secretary of Labor Thomas E. Perez, EBSA News Release Number 14-1043-NAT, June 3, 2014
Bloomberg BNA, BNA Tax and Accounting Center, July 28, 2014, DOL Settlement Is a Cautionary Tale for ESOP Trustees