People Care Holdings Inc., New York, and its former owners agreed to pay $10 million to settle a lawsuit brought by the Department of Labor alleging inflated stock values paid by the ESOP, as well as other improprieties.
Bruce Jacobson and Jerry Lewkowitz, the former owners of the home-care agency, created the employee stock ownership plan to sell the company to their employees, according to DOL officials, who argued the stock purchase price exceeded the fair market value, violating the Employee Retirement Income Security Act. The valuation relied on “unrealistically optimistic projections of People Care's future earnings and profitability, even after People Care lost a key municipal contract,” according to a DOL statement.
The investigation by the Employee Benefits Security Administration's New York regional office also found the stock purchase agreement's indemnification provision to be invalid because it required the ESOP, as the owner of the company, to pay any costs incurred by the former owners for an investigation or litigation.
Messrs. Jacobson and Lewkowitz agreed to pay $9.1 million to the ESOP and a civil penalty of $900,000. Their attorney, Robert Perry of Jackson Lewis PC in New York, declined to comment.
Dan Gagnier, People Care spokesman, said: “People Care's independently and professionally valued transaction to become an ESOP company was approved by a discretionary, independent and institutional trustee (and) complied in all respects with all legal requirements.” The company agreed to settle to “focus on doing what is best for our clients and employees and for the ESOP participants,” Mr. Gagnier said.
“Owners who sell their companies to their employees and benefit from ESOP tax treatments are responsible for ensuring that the terms are fair to the plan and its participants,” Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi said in a statement. “They have a duty to monitor the independent trustees that they appoint to oversee the transaction.” Calls to GreatBanc Trust Co., the ESOP's independent trustee, were not returned at press time.
The ESOP has 4,655 participants. According to 2012 records, the ESOP had $8.6 million in assets; the company also offers a 401(k) plan with 181 participants had $856,874.
