The fiduciary of the Appvion Inc. Retirement Savings and Employee Stock Ownership Plan sued the bankrupt paper company's former management team, its board of directors and a slew of advisers for allegedly inducing employees to take money out of their 401(k) accounts to purchase 100% of the stock of Appvion's parent company, Paperweight Development Corp.
In a 138-page complaint filed Monday in U.S. District Court in Green Bay, Wis., Grant Lyon — the sole member of Appvion's ESOP administrative committee — accused the defendants of fraudulently persuading employees to buy PDC stock and concealing the stock's true value. As a result, the ESOP and its participants suffered hundreds of millions of dollars in damages, according to the complaint.
The retirement plan had $188 million as of year-end 2017, according to its most recent Form 5500 filing.
The lawsuit alleges that Appvion's management and professional advisers inflated the value of PDC stock in each semi-annual appraisal from November 2001, when the stock was purchased, through Appvion's bankruptcy in October 2017 by, among other things, failing to make deductions for material liabilities such as pension and post-retirement-related liabilities of up to $175.5 million. It claims they "sold the scheme to the employees" by telling them that if they came up with at least $100 million, the company could borrow the rest — almost $700 million — to buy PDC's stock.
The defendants, the lawsuit said, "downplayed the risks and appropriateness of transferring funds from an existing employment retirement plan to a new, highly leveraged undiversified ESOP."
In the suit, Mr. Lyon berated the company's former CEO and general counsel for representing that its adviser, Houlihan Lokey Howard & Zukin Capital, was independent. Houlihan Lokey's fee was contingent on the deal closing and it was structured as a percentage of the final purchase price, a disclosure the management team did not make, according to the complaint.
A spokesman for Houlihan Lokey declined to comment on the case.
In addition to Houlihan Lokey, the lawsuit names State Street Global Advisors, the ESOP's trustee; Willamette Management Associates and Stout Risius Ross, the firms that provided the company's appraisals; and a string of other advisers, along with all the members of the company's senior executive team, board of directors, and ESOP committee.
"We believe this lawsuit is wholly without merit and intend to vigorously defend," a spokesman for State Street said in an email.
Stout Risius Ross’ legal department declined to comment. Willamette had no one available to comment.
The lawsuit blasted the executive team for leaving the company and cashing out their personal investments in PDC stock when Appvion's appraised value was at or near its highest point.
"These departures, timed to coincide with the fraudulently high stock valuations, caused the ESOP Plan and Appvion to drastically overpay these executives and drained Appvion's critical cash reserves," the lawsuit claims.
Mr. Lyon learned of the alleged fraudulent appraisals of PDC's stock in August 2017 when he was appointed to replace the entire Appvion ESOP committee, according to the lawsuit.
Mr. Lyon is seeking to recover damages suffered by the ESOP, including those resulting from the alleged inflated appraisals and stock price and the undisclosed conflict of interests. He also seeks to recover the amounts paid to the management insiders and ESOP fiduciaries who sold their stock at inflated values. In addition, he seeks to recover from management and directors for the waste of Appvion corporate assets when they approved the payment of more than $57 million for the purchase of PDC stock. Lastly, he seeks to recover all fees paid to Houlihan Lokey.
