An Employee Stock Ownership Plan (“ESOP”) is a type of qualified retirement plan that provides employees with ownership interest in their company through shares of stock. The purpose of an ESOP is to align employee interests with those of the company, since its employees are also stockholders. Through an ESOP, employees can either purchase stock from their employer or receive stock from the company as compensation. Ownership rights to the stock are typically subject to a specific vesting schedule. For example, the company may give an employee 20 shares of company stock upon completion of the employee’s first year and then 100 shares after completing a fifth year, and so forth. The shares of stock that the employee is entitled to own and sell is referred to as “vested stock.” Over time, an employee’s vested holdings—and hopefully wealth—will increase with the growth of the company.
After an employee resigns or retires from an ESOP-sponsoring company, the employee is entitled at some point to receive the fair market value of their vested stock. When a company is publicly traded, fair value is easily computed—it’s set by the market on which the stock trades (e.g., The New York Stock Exchange). For companies whose stock is privately held, an independent fair valuation must be made. The company is responsible for procuring, reviewing, and ultimately accepting this valuation. These valuations are critically important for departing employees who are entitled to a fair valuation—their retirement and financial well-being may depend on it.
Employee Stockholder Rights Under ERISA
Employees have a variety of rights under the Employee Retirement Income Security Act of 1974 (ERISA) to help ensure that the company lives up to its obligations and computes a fair valuation of company stock. A company accepting a bad valuation at face value is a true sign of pension mismanagement and a breach of the fiduciary duties under ERISA that it owes to its employees.
2021 Class Action Seeks Fair Value from West Monroe Partners
Employees can sue on their own behalf or bring class actions. Over the years, employees have brought numerous lawsuits against their companies and advisors. Most of these concern improper valuations that have resulted in management enriching itself at the expense of ESOP participants. In 2021, Sanford Heisler Sharp investigated a situation in which a private company forced all the ESOP participants who had either resigned or been laid-off in 2020 to sell back their company stock based on a December 31, 2020 valuation. Not long after the former employees received their proceeds, the company announced it had sold half of the company’s stock to a third party for a value that was approximately five times greater than the value at which the company had priced the employees’ stock.
After it completed its investigation, Sanford Heisler Sharp filed an ERISA class action case in December 2021 on behalf of the former employees who had been forced to sell their stock at the December 31, 2020 valuation. The case seeks recovery under ERISA of the fair value the former employees should have received. The case is pending in the United States District Court for the Northern District of Illinois. Daly v. West Monroe Partners et al., Case No. 1:21-cv-06805 (N.D. Ill)
Department of Labor Files Claim Alleging Insider Stock Deal
The Department of Labor (DOL) can also sue and initiate claims on behalf of ESOP participants. In October 2021, the DOL brought claims against a company and ESOP fiduciaries for transferring most of the company stock held by the ESOP and employee participants to company insiders and relatives at a ridiculously low valuation. The DOL claims the insiders paid the ESOP $12.5 million for stock that was worth up to $52 million in value. Like our Daly claims, the Department of Labor seeks recovery of the fair value the ESOP should have received. The case is pending in the United States District Court for the Eastern District of Texas. Walsh v. Robert Peterson et al., Case No. 4:21-cv-00867 (E.D. Texas)
If you have questions or concerns about whether you have been the victim of ESOP and 401k mismanagement, Sanford Heisler Sharp has a number of financial services and employment lawyers in San Diego and New York with extensive experience dealing with complex investment data and valuation models to evaluate whether you have been victimized.