The owner of PCI, a commercial
janitorial company that contracted with area school districts, and CDM, a
company that performed construction and property management services in
a metro area in Kansas, has pleaded guilty to theft from an employee
benefit plan.
According to the plea agreement,
in November 2010, the owner signed a trust agreement with Nationwide to
establish the PCI Building Services 401(k) plan. CDM employees could
also participate in the plan, which provided for a matching contribution
on employee deferrals. She provided her bookkeeper with a list of
employees who wanted to participate in the plan and their deferral
amounts. Deferrals were withheld form employee paychecks as of February
1, 2011.
On December 31, 2011, Nationwide sent quarterly
statements to retirement plan participants, which showed no
contributions deposited to their accounts. The bookkeeper provided the
owner with a reconciliation showing that contributions were missing from
the 401(k) plan. Several participants confronted the owner about
missing 401(k) contributions. The owner assured employees their funds
were being held in escrow with Nationwide, although she was using the
contributions for her own benefit.
She went so far as to blame
her accountant for embezzling as much as $1.2 million from the company
and filed a police report. She also filed a complaint with the Office of
Disciplinary Administrator against a former employee, saying that
employee was responsible for administration of the plan.
However,
in May 2013, the owner met with a Department of Labor (DOL) civil
investigator and admitted she was the responsible party and agreed to
set up payments to reimburse funds she embezzled from the 401(k) plan.
The
plea agreement orders the owner to restore at least $50,000 to the
plan. The U.S. District Court for the District of Kansas must still
accept the plea agreement.
A participant in the Sears Holdings
Savings Plan has filed a proposed Employee Retirement Income Security
Act (ERISA) class action lawsuit alleging Sears continued to hold
company stock in its retirement plan when it was no longer prudent to do
so.
According to the complaint,
Sears Holdings Corporation has not had a profitable year since 2011,
and has not had a profitable quarter from business operations since
2010. Sears has a net loss attributable to shareholders of $10.196
billion since year-end 2010. The complaint contends Sears faces
inevitable bankruptcy.
“This case is about the Defendants’ abject
failure, as Plan fiduciaries, to protect the interests of the
Participants in violation of Defendants’ legal obligations under ERISA,
including ignoring the excessive risk imposed on Participants by the
rise in the debt-equity ratio of Sears, and other objective factors that
imposed risks to the Fund by Defendants’ actions and inactions,” the
lawsuit says.
It alleges that even if the plan purportedly
required that Sears Stock be offered, the plan’s fiduciaries were
obligated by law to disregard that directive once it became clear
company stock was no longer a prudent investment for the plan.
“The
thrust of the plaintiff’s allegations under Counts I (breach of ERISA’s
duty of prudence) and II (breach of ERISA’s duty of loyalty) is that
defendants allowed the investment of the plan’s assets in Sears Stock
throughout the class period (July 14, 2014, to the present) even after
they knew or should have known, through publicly available information,
that Sears was in extremely poor financial condition and faced equally
poor prospects indicating that it had experienced a sea-change in its
risk profile and its prospects, making it an imprudent retirement plan
investment vehicle.”
The complaint says defendants were empowered
and obliged by ERISA to remove Sears Stock from the plan, yet they
failed to do so, or to act in any way to protect the interests of the
plan or its participants, until it was too late to make any material
difference, in violation of ERISA. “Freezing purchases of the Fund at
year end 2016 was too little, too late, to protect a great deal of
Participants’ retirement savings,” the lawsuit says.
NEXT: What Sears should have done
The lawsuit says the Sears Stock price collapse of more than 80%
during the Class Period, which devastated the plan’s assets, could have
and would have been avoided in whole or in part by defendants complying
with their ERISA fiduciary duties. Defendants could have taken certain
actions based on the publicly known information alone such as, and not
limited to: investigating whether Sears Stock was a prudent retirement
investment; retaining outside advisers to consult them or to act as
fiduciaries; seeking guidance from governmental agencies (such as the
Department of Labor or Securities and Exchange Commission); resigning as
fiduciaries of the plan; stopping or limiting additional purchases of
Sears Stock by the plan; utilizing the fund’s unitization such that it
was only primarily invested in Sears Stock; and/or by divesting the
Sears Stock held by the plan.
To the extent the defendants wanted
to take action based on non-publicly disclosed information that they
were privy to, according to the complaint, the following alternative
options were available to defendants “and (a) could have been done
without violating securities laws or any other laws, (b) should have
been done to fulfill Defendants’ fiduciary obligations under ERISA, and
(c) would not have been more likely to harm the Plan than to help it.”
First,
according to the lawsuit, defendants could have and should have
directed that all company and participant contributions to the Company
Stock fund be held in cash rather than be used to purchase Sears Stock.
The refusal to purchase Company Stock for the Company Stock fund is not a
“transaction” within the meaning of insider trading prohibitions, the
complaint notes. This action would not have required any independent
disclosures that could have had a materially adverse effect on Sears
Stock’s price.
Alternatively, the complaint suggests defendants
should have closed the fund itself to further contributions and directed
that contributions be diverted from the fund into other (prudent)
investment options based upon participants’ instructions or, if there
were no such instructions, the plan’s default investment option. A
further alternative available to defendants was to utilize the fund’s
unitization so that participants were less exposed to Sears Stock.
“Because
Defendants could and should have concluded that Sears Stock was an
imprudent retirement savings vehicle based solely upon public
information, no disclosure was required before conducting an orderly
liquidation of the Plan’s holdings,” the lawsuit contends.
The suit asks Sears to make good to such plan any losses to the plan and
for the court to impose “such other equitable or remedial relief as the
court may deem appropriate.”