Vermont Business Magazine After a US Department of Labor Employee Benefits Security Administration investigation, the US District Court for the District of Vermont has entered a consent judgment requiring the fiduciaries of the Sonnax Industries’ employee stock ownership plan (ESOP) to pay $2,225,000 to the plan. The judgment resolves violations of the Employee Retirement Income Security Act stemming from the ESOP’s 2011 purchase of Sonnax Industries Inc, a Bellows Falls supplier of automotive drivetrain products. The settlement was announced today. Principals Tommy Harmon and Frederick Fritz have vigorously denied the DOL claims and any suggestion of wrongdoing.
Under the terms of the settlement, the two company officers and ESOP fiduciaries will pay $2,000,000 to the ESOP to settle claims and an additional $200,000 in civil penalties to the US Department of Labor, while independent fiduciary First Bankers Trust Services Inc will pay $225,000 to the ESOP and an additional $25,000 in civil penalties.
In October 2017, the Board of Directors received an unsolicited offer to buy Sonnax. The offer – which the Board recognized would greatly benefit the employees – was contingent upon settlement of the lawsuit. Harmon and Fritz shared this information with the DOL in November of 2017, and the DOL agreed to dismiss the litigation if Sonnax was sold for at least $65 million. This condition was fulfilled with the March 30, 2018, sale of the assets of Sonnax Industries, Inc to Sonnax Transmission Company, a newly-formed subsidiary of Marmon Holdings, Inc.
Additional requirements of the settlement stipulate Harmon and Fritz pay $2 million to the ESOP trust, and First Bankers Trust pay $225,000 to the trust as well. These payments are for the benefit of the Sonnax Industries ESOP plan participants, a group that includes both current and former employees.
DOL regulations require a civil penalty in the event of a settlement, so Harmon and Fritz paid $200,000 and First Bankers Trust paid $25,000.
They settled on the terms imposed by the DOL solely because it was in the best interest of the employee-owners of Sonnax Industries, they said in a statement. The employee-owners of Sonnax agreed, they said, voicing overwhelming support of the deal in a proxy vote required as part of the transaction (98 percent voted in favor). Sonnax employees will now share in more than $35 million in proceeds from the sale. This is a significant financial reward for Sonnax employees and counters the DOL argument, they said, that the ESOP was overcharged and suffered significant financial losses as a result of the 2011 transaction creating the ESOP.
The final settlement was contingent upon Marmon Holdings Inc’s purchase of Sonnax Industries for an amount exceeding $65 million. That condition was met on March 31, 2018, when the purchase occurred. At that price, the proceeds allocated to the ESOP participants were estimated to be three times the allocated value of their shares as of September 30, 2016. The settlement also excludes Harmon from receiving any settlement monies and prohibits offset of the payments by Harmon, Fritz, First Bankers Trust Services Inc or any other party.
In a story first reported by Vermont Business Magazine in January 2017, The US Department of Labor sued Sonnax Industries, company officers and ESOP fiduciaries Tommy Harmon and Frederick Fritz, and Illinois-based First Bankers Trust Services Inc in December 2016, following the Employee Benefits Security Administration (EBSA) investigation. The suit alleged that First Bankers Trust Services Inc -- hired by Harmon and Fritz as an independent fiduciary to advise the ESOP on the purchase -- had the plan overpay for Sonnax Industries stock by millions of dollars, which caused the plan to suffer sizable financial losses.
The suit alleged that Harmon and Fritz sold their stock shares to the employees of Sonnax via the ESOP at a price that exceeded the company’s value.
Former CEO Harmon said in a statement dated May 8 that: “I am confident we would have prevailed had this case gone to trial. Rick and I took the high road and did what we felt was best for the employee-shareholders of the ESOP. Without the settlement, this opportunity for the employee-shareholders to cash out through the acquisition would have been missed, which would have been wrong.”
His and Sonnax's attorney, Tris Coffin of Downs Rachlin Martin, told VBM that they would have "fought this aggressively" and would have won in court, "but it would have killed the sale" to Marmon.
"It's really unfortunate that the DOL hung these guys out with this," Coffin said, who said that there never was any basis for the suit.
"What Tommy and Rick really did was the best for the employees," he said. "In my book, that makes them heroes."
While he acknowledged that they had not yet got deeply into the discovery part of the DOL lawsuit to understand from where it emanated, he noted that First Bankers Trust, as previously reported by VBM, has had to settle other ESOP cases with the DOL.
Coffin said First Bankers is out of money and the DOL required that someone "pay tribute," so Harmon and Fritz did so to allow the sale to Marmon to go through. Harmon and Fritz agreed to the settlement but maintain they’ve done nothing improper.
Coffin said Sonnax is a growing manufacturer in Vermont with a strong workforce and as a Vermonter he understands the value of both to the state.
New CEO Steve Boyer, left,with former Sonnax CEO Tommy Harmon. Sonnax photo.
Marmon Holdings, Inc, is a subsidiary ofWarren Buffett’s company, Berkshire Hathaway. Marmon is an umbrella company for 175 independent manufacturing and service businesses with facilities in 23 countries and total revenues exceeding $7.7 billion, as of 2017.
Steve Boyer will take over from Tommy Harmon as CEO. Harmon will continue to work with Boyer for the foreseeable future to ensure a smooth transition.
At the end of last year, Sonnax had 246 employees with 200 in Vermont and 46 in New Jersey. In 2017 it reported to VBM that revenues were $67.5 million. A common valuation for a company is one-year's revenues, which in this case is just about what Marmon paid for Sonnax.
“EBSA intends to ensure that stockowners who sell their shares to an ESOP do not receive a windfall at the participants’ expense,” said Carol Hamilton, EBSA’s Acting Regional Director in Boston, in a statement. “The price an ESOP pays for the stock should reflect its true market value, and advisers who have been retained to fulfill their fiduciary duties under ERISA with regard to stock purchase must represent the interests of the plan participants and beneficiaries.”
“The U.S. Department of Labor will aggressively pursue those who breach their fiduciary responsibilities and place their own interests above those of the plan’s participants, who look to the plan to provide some measure of financial security in their retirement,” said Michael Felsen, the Department of Labor’s New England Regional Solicitor. “This case sends a strong message that the Department of Labor will investigate breaches of fiduciary duty and will hold the defendants personally liable to restore losses to the plan.”
The EBSA’s Boston Regional Office investigated the case, and senior trial attorney Gail E. Glick and trial attorney Niamh E. Doherty in the Department’s Regional Office of the Solicitor in Boston litigated the case. ERISA Counsel Marjorie Butler oversaw the litigation.
Employers and workers can reach EBSA toll-free at 866-444-3272 for help with problems related to private sector retirement and health plans. Additional information can be found at https://www.dol.gov/agencies/ebsa.
Civil Action No. 5:16-cv-00328-GWC: Acosta v. First Bankers Trust Services, Inc.; Tommy A. Harmon; Frederick Fritz; Sonnax Industries Inc.; and the Sonnax Industries Inc. Employee Stock Ownership Plan
Source: US DOL. 5.8.2017