A Department of Labor push to curb employee stock ownership plan abuses is catching more plan sponsors and their fiduciary consultants for a variety of transgressions.
Those transgressions include overvalued stock, ill-timed stock purchases, conflicts of interest and outright plan mismanagement.
In the past year alone, investigators with the Labor Department's Employee Benefits Security Administration, which oversees all types of benefit plans, have worked with the DOL's Office of the Solicitor to bring lawsuits seeking nearly $100 million in repayments to ESOP plans for questionable transactions, and settled other sizable cases.
“It seems like we've seen increased audit activity and an increased desire to litigate more,” said Brian D. Hector, partner with law firm Morgan Lewis & Bockius LLP in Chicago. “The aggressiveness of the litigation has increased, too.”
“The number of lawsuits in the past six months is unprecedented,” agreed J. Michael Keeling, president of the ESOP Association in Washington, which represents 1,600 companies with stock ownership plans.
ESOP stock purchases are typically used to free up operating cash, avoid capital gains or to cash out departing executives, who would otherwise have big tax bills. That makes it tempting, say officials, for company executives to hire appraisers who will give firms the price they want for the stock, and supposedly independent fiduciaries who will green-light the transactions.
EBSA officials and their counterparts in the Office of the Solicitor pay particular attention to closely held companies, where the combination of hard-to-value assets and possible conflicts of interest among company executives with fiduciary responsibilities can create potential for abuse or insufficient oversight.