"Class Action Alleges Firm's Directors Violated ERISA in Selling Stock at High Price" by Joel J. Meyer The board of directors of a bankrupt paper manufacturer breached their fiduciary duties when they sold their shares of company stock to the company's employee stock ownership plan at a price above fair market value, according to a class action filed Sept. 20 in the U.S. District Court for the Western District of New York by four plan participants (Beam v. HSBC Bank USA, W.D.N.Y., No. 02-CV-682, lawsuit filed 9/20/02). The lawsuit also charged that the plan's trustee, HSBC Bank USA, breached its fiduciary duties under the Employee Retirement Income Security Act when it allowed the plan to purchase the directors' shares at a price above fair market value just one day after HSBC became the plan's trustee. "The American public has been disillusioned by the abuses associated with employer stock purchased by the retirement plans of large public companies like Enron and WorldCom, but the dirty secret of American retirement policy is that the universe of closely held company ESOPs is rife with abuse by corporate insiders," Marc Machiz of Cohen, Milstein, Hausfeld & Toll, Washington, D.C., said. Machiz represents the four participants who filed the lawsuit. Azon Inc., a paper manufacturer based in Johnson City, N.Y., created an ESOP in 1989. According to the lawsuit, Azon made contributions to the plan and the plan was invested primarily in Azon stock. By 1998, the ESOP held over $10 million worth of Azon common stock, representing approximately 10 percent of the equity in Azon, the lawsuit said. In 1998, an appraiser assessed the fair market value of Azon stock as ranging between $860 and $1,060 per share. HSBC Becomes Trustee On Sept. 20, 1999, Azon, through its ESOP administrator, entered into a trust agreement with HSBC whereby HSBC agreed to serve as the ESOP's trustee, according to the lawsuit. Just one day later, the ESOP engaged in a leveraged transaction in which it increased the ESOP's stock ownership in Azon from 19 percent to 57 percent by purchasing 20,000 shares of stock from the company's directors for $1,250 per share, the lawsuit alleged. According to the lawsuit, the company financed the transaction through a $25 million bank loan. The lawsuit charged that the purchase price of $1,250 per share constituted a price in excess of the fair market value of the price of Azon stock. In so charging, the lawsuit alleged that the $1,250 per share price did not take into account the $25 million debt imposed on Azon that was used to purchase the shares. According to the lawsuit, three months after the ESOP transaction occurred, an appraiser assessed the fair market value of Azon stock at $1,008 per share. In addition, the appraiser determined that because of the ESOP transaction, the plan's assets had dropped to just over $2 million. In March 2002, Azon informed its employees that as a result of the company's debt due to the Sept. 21, 1999, transaction, the company was unable to fund the ESOP, according to the lawsuit. The company later told employees that an independent appraisal firm had determined that the stock had zero value. On July 24, 2002, Azon filed a voluntary petition for bankruptcy. Fiduciary Breaches Alleged The lawsuit, filed against Azon's individual board of directors, the ESOP administrator, and HSBC, charged that by permitting the ESOP to engage in the $25 million stock purchase transaction, the defendants breached their ERISA fiduciary duties. In addition, the lawsuit alleged that the board of directors failed to properly appoint, monitor, and remove the plan administrator and HSBC. The lawsuit also alleged that the directors directed or suggested that the administrator and HSBC engage in the ESOP transaction. Moreover, the lawsuit alleged that the $25 million stock purchase transaction violated ERISA because the ESOP paid more than "adequate consideration" for Azon stock. In addition, the lawsuit claimed that by selling their shares of common stock to the ESOP, each of the directors breached their fiduciary duties under ERISA. Azon could not be reached for comments on the lawsuit. A representative from HSBC told BNA that, as a matter of policy, the company will not comment on matters in litigation. The complaint can be found on Cohen Milstein's website at
http://www.cmht.com/pdfs/hsbc-cmpl.pdf. Reproduced with permission from BNA Pension & Benefits Daily, Vol. 2, No. 187, "Class Action Alleges Firm's Directors Violated ERISA in Selling Stock at High Price" (Sept. 26, 2002). Copyright 2002 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com |
