Compliance January 25, 2016

SCOTUS Again Remands Stock Drop Case

The Supreme Court returned Amgen’s ESOP case to the lower court for a second time.
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The U.S. Supreme Court in a per curiam decision on Monday sent back, for the second time, the 9th U.S. Circuit Court of Appeals’ decision reviving a proposed Employee Retirement Income Security Act (ERISA) class action against Amgen Inc. 

SCOTUS says in its decision that the appellate court failed to properly evaluate the complaint, given a new precedent. 

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The first time, the high court vacated and remanded, in light of Fifth Third Bancorp v. Dudenhoeffer, which set forth the standards for stating a claim for breach of the duty of prudence against fiduciaries who manage employee stock ownership plans (ESOPs). On remand, the circuit court reiterated its conclusion, and this time, the Supreme Court reversed for Amgen, saying in its four-page, unsigned opinion, that it “has not found sufficient facts and allegations to state a claim for breach of the duty of prudence.”

According to the high court’s ruling, the 9th Circuit failed to assess whether the complaint in its current form has plausibly alleged that a prudent fiduciary in the same position could not have concluded that the alternative action “would do more harm than good.”

The circuit court did not correctly apply Fifth Third, the high court said, but emphasized that Amgen stockholders are “masters of their complaint. The court leaves to the District Court in the first instance whether the stockholders may amend it in order to adequately plead a claim for breach of the duty of prudence guided by the standards provided in Fifth Third.”

Notwithstanding the lack of a presumption of prudence, the Fifth Third decision acknowledged that the congressional encouragement for creating ESOPs could potentially clash with ERISA’s general duty of prudence.

Given the potential for conflict that arises when fiduciaries are alleged to have failed to act on inside information about the value of the employer’s stock, ESOP fiduciaries confront unique challenges, the ruling said. Fifth Third therefore laid out standards to help “divide the plausible sheep from the meritless goats.”

The Supreme Court’s opinion is here.

Compliance January 25, 2016

DOL Files Suit Over Employer Stock Valuation

The U.S. Labor Department filed a lawsuit against a Florida employer accused of imprudence in the valuation and sale of the company’s stock to its own employees. 
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A new lawsuit filed by the Department of Labor seeks to recover losses suffered by participants in an employee stock ownership plan (ESOP) due to alleged overvaluation of the company stock.

The employer in question is Commodity Control Company, based in Miami, Florida, and co-owned by David and William Pilger. The pair were also trustees of an employee stock ownership plan (ESOP) established by the company under the Employee Retirement Income Security Act (ERISA). According to an investigation by the DOL’s Employee Benefits Security Administration (EBSA), the defendants “acted with imprudence, disloyalty, and contrary to plan documents; and engaged in prohibited transactions in violation of ERISA. Specifically, they caused the ESOP to purchase employer common stock for greater than fair market value.”

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According to EBSA, early in 2009, the Pilger brothers caused the ESOP “to buy their entire ownership interest in the company for $9.1 million, thereby causing the ESOP to acquire 100% of the company.”

The complaint alleges that the ESOP “overpaid for the company stock” as a result of the defendants’ failure to obtain an accurate and current appraisal of the company stock. Defendants are also accused of “failing to ensure that the independent appraiser of the company stock had accurate and complete financial information; perform a review of the valuation reports prepared by an independent appraiser; and not questioning assumptions underlying the valuation reports.”

The complaint also alleges that the defendants violated ERISA when they “caused the promissory notes issued by the ESOP to David and William Pilger to include default provisions that were contrary to the ESOP document.” In particular, the ESOP document “limited recovery to the amount of the default; however, the promissory notes required the ESOP to immediately repay the notes and pay the cost of collection and attorney fees in the event of default.”

Taking it all together, the DOL is asking the U.S. District Court for the Southern District of Florida, Miami Division, to “require the defendants to jointly and severally restore losses caused to the ESOP as a result of their fiduciary breaches; to require David and William Pilger to disgorge any cash, payments or proceeds that they received for any of the ESOP stock purchases; and to permanently enjoin all defendants from serving as fiduciaries or service providers to ERISA plans in the future.”

The full text of the complaint is here. 

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