The DOL and ESOP Trustees

What Recent Cases Can Tell Us


Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

The Employee Retirement Income Security Act of 1974 (ERISA) was enacted by Congress in an effort to protect employees and the benefit plans created for them by their employers. ERISA carved out a provision for Employee Stock Ownership Plans (ESOPs) to purchase employer stock provided the purchase was for “adequate consideration.” Adequate consideration for a closely held business interest is the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan (ERISA 3 (18) (B). Trustees hire business valuators to provide an independent value of the Company in order to determine the fair market value of the asset.

Based on various cases in the last few years, it is becoming clear that the Department of Labor (DOL) is looking for the trustees to do more than just hire a valuator and rely on the value determined by that valuator. The following cases all dealt with the sale of stock to an ESOP and whether or not the trustee was negligent in its due diligence in determining value.

Acosta v Vinoskey – 2018

A Virginia company which designed and sold equipment for soft drink manufacturers is at the center of the most recent case. The original owners of the company formed an ESOP whose primary purpose was to invest in the Company’s stock.

In 2004, the ESOP bought 48% of the company for $220 per share ($9 million). By 2010, the original owners were ready to sell the remaining 52% interest to the ESOP. An independent trustee represented the interests of the ESOP and subsequently hired an independent valuation company. The valuation firm was the same as was used in the prior transaction. The initial draft submitted by the valuation firm provided a value of $406 per share. The most recent prior year valuation was $285 per share. When questioned by the independent trustee, the valuator explained that the new value represented a controlling value. The trustee accepted the explanation and the ESOP bought the remaining shares for $406 per share ($20,800,000).

The DOL filed a complaint alleging that the trustee breached its fiduciary duty by causing the ESOP to pay more than “adequate consideration”. The DOL argument was that the trustee should not have relied on the valuations of the independent valuator. The sizable increase in value should have been a red flag to the trustee.

Both sides petitioned for Summary Judgement. The court ruled that too many factual disputes between the parties existed to issue Summary Judgement. The court stated that based on evidence to date, the issue of whether or not the trustee made “an honest, objective effort to read the valuation, understand it, and question the methods and assumptions that do not make sense” was something reasonable fact-finders could disagree on.

This case is likely headed to court and we will have to keep an eye out for the results.

Perez v First Bankers Trust Services – 2017

This case involves a New Jersey site preparation contractor. In January 2007, an offering memo was prepared and presented to potential third-party lenders in anticipation of a sale of 380,000 shares of the company for $16 million.

A professional trustee was hired to represent the ESOP (First Bankers Trust Services). First Bankers Trust (FBTS) hired Prairie Capital to serve as financial advisor/independent valuator. FBTS chose Prairie because they were an experienced ESOP valuation firm.

Prairie determined a value of $16.4 million for seller’s interest. Since their value was only slightly more than the offering memo, Prairie advised FBTS that the initial offering of $16 million was fair. The ESOP bought the shares in April 2007 for $16 million.

In 2009, the DOL initiated an investigation that turned into a formal complaint. The DOL sued FBTS claiming breach of fiduciary duties and engaging in a prohibited transaction.

The matter went to trial in 2016. The DOL argued the valuation was unreliable and relying on it was not reasonable. Furthermore, the DOL made the argument that the trustee failed the ESOP by failing to scrutinize and challenge the valuation before the transaction closed.

FBTS argued the valuations were comprehensive and in line with the normal and customary valuation procedures expected. FBTS argued that by using a “major player” (Prairie) in ESOP valuations that it was reasonable to rely on the valuation. The DOL expert provided a valuation of $6.5 million for the shares.

The court ruled that FBTS failed to perform its duty to “make an honest, objective effort to read the valuation report, understand it, and question the methods and assumptions that did not make sense.”

The court stated “FBTS did little more than delegate all of its responsibilities to third parties”. Therefore, it failed in its duties to the ESOP and was liable for the $9.5 million overpayment.

Brundle v. Wilmington Trust – 2017

A private security firm whose primary clients included the Department of State and U.S. Department of Defense is the center of this case. In 2013, the Company began considering an ESOP with an unusual structure – four existing owners would sell 90% of the Company to the ESOP and exchange the remaining 10% of the Company for warrants – allowing the sellers to buy back equity in the company and allow them to keep control by appointing the majority of the board of directors.

The Company hired Wilmington Trust (WT) as the independent trustee of the ESOP. WT hired Stout Risius Ross (SRR) as financial advisor/valuator. Valuations of the Company had been previously prepared by the McLean Group. The valuations had been prepared on an annual basis for employee stock options and financial reporting purposes for the prior three years. The most recent January 2013 valuation concluded an equity value of $165 million with a per share price of $1,838 for voting stock and $1,746 for nonvoting stock.

SRR prepared a valuation in November 2013. SRR used a Discounted Cash Flow (DCF) method, the same methodology used by McLean but with different inputs. In the original draft valuation, SRR weighted the DCF and a Guideline Public Company method. They determined an equity value between $283 million and $338 million with a price per share between $3,865 and $4,600. They presented the median per share price of $4,232 – rounded to $4,235.

The trustee only asked SRR a few questions regarding the draft valuation. One question was who prepared the projections. They were told the projections were prepared by independent management.

Brief negotiations ensued between the trustee and the sellers. The sellers asked for $4,525 per share; the trustee offered $3,900 per share. Ultimately, and fairly quickly, the parties settled on the median $4,235 per share. A final valuation report was issued by SRR with a final value of $4,235 per share.

Early 2014 brought several problems to the Company leading to a decrease in revenues. Management considered a sale to a third party. The potential buyer insisted on approval from the ESOP trustee for the sale. SRR prepared a new valuation and determined the value of the Company had dropped since the end of 2013. SRR determined that the offering price by the new buyer was fair to the ESOP. The new buyer purchased the Company for $281.1 million, with trustee approval, ending the ESOP seven months after it was formed.

A suit was brought against Wilmington Trust for engaging in a prohibited transaction. If a prohibited transaction existed, was there a defense in that the purchase of the sellers’ stock was for adequate consideration? The court considered whether the trustee acted in accordance with its fiduciary obligations including investigating the financial expert’s qualifications, providing the expert with complete and accurate information and making sure reliance on the expert’s advice is reasonably justified.

Based on testimony from the McLean valuator, the court found the trustee was liable. The court essentially ruled that the trustee allowed the ESOP to purchase the Company’s stock for more than fair market value. The court felt that the trustee should have performed a more thorough review of the SRR report. The court believed if it had done a more thorough review, it would have questioned part of the analysis and the value conclusion. The court also believed the trustees should have looked at and considered the McLean valuation when reviewing the SRR valuation. Had they seen the $100 million difference in an 11-month period, questions would have been raised. The court also believed the trustees should have questioned the management projections used in the SRR valuation. Management personnel were entitled to receive cash bonuses and stock appreciation rights based on the total purchase price of the stock. A higher value meant higher compensation to the management team.

In this case, because the ESOP was so short lived, the participants did not actually incur any loss. But the real concern under ERISA was how much damage the ESOP suffered by overpaying for the stock. The court found that the ESOP overpaid by almost $28 million as a result of Wilmington Trust’s failure to adequately vet the SRR valuation report. A motion of reconsideration was filed by Wilmington Trust. The court stood by its $28 million damages award.

The case will likely be appealed.

Sonnax Industries

In December 2016, the DOL sued Sonnax Industries, the company officers who were the original ESOP fiduciaries and First Bankers Trust Services, alleging the parties allowed the ESOP to overpay for the stock of Sonnax Industries in 2011. In this particular case, the Board of Directors of Sonnax received an unsolicited offer to purchase Sonnax in October 2017. However, the purchase was contingent upon settlement of the lawsuit with the DOL. The Company officers believed the sale of the Company was in the best interest of the Company and the ESOP so they agreed to settle with the DOL by virtue of a payment to the ESOP trust of $2 million and $200,000 of civil penalties to the DOL. The officers believe they would have prevailed in the suit with DOL but to continue to fight would have precluded the sale of the Company for $65 million.


The author of this article is aware of at least one more case in which the DOL is alleging trustees have breached fiduciaries duties by allowing an ESOP to overpay for Company stock. Once again, the DOL has accused the independent trustee of failing to adequately and independently analyze the valuation and thereby, failed to perform their due diligence. This is not a published case and has not yet been resolved.

ESOP trustees, independent or otherwise, must be aware that the DOL is calling into question the level of due diligence being undertaken when relying upon a valuation for the determination of the fair market value of a Company’s stock in an ESOP transaction. ESOP trustees should not be simply relying on a valuation. They should be reading and understanding the methods and assumptions used by the valuator. They should be questioning the valuator regarding the assumptions and methods used and they should be documenting the conversations including questions asked, answers given and conclusions reached. Any valuation professional worth his/her weight is willing to sit down and walk through their valuation with the client.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV, Director, specializes in business valuations and forensic accounting. You can reach her at (480) 483-1170 or