The Department of Labor has filed a lawsuit against Valencia, California-based Gruber Systems Inc. and its CEO John Hoskinson, saying that they caused the company’s employee stock ownership plan participants to lose money when the plan bought additional company stock at considerably more than fair market value in two transactions totaling $2.6 million.
The suit says that, instead of the money being put aside to fund the retirement accounts of Gruber retirees, it was channeled into the stock purchases to shore up the company during financial troubles.
Gruber provides molds, automation equipment, and supplies for the cast polymer and other composite-related industries.
The DOL suit seeks a reversal of the $2.6 million in prohibited stock transactions, the restoration of any related plan losses, including lost opportunity costs, and a court order requiring the defendants to account for and restore losses to plan participants.
In addition, the DOL is also seeking permanent enjoinment of Hoskinson from serving as a fiduciary or service provider to any plan covered by the Employee Retirement Income Security Act and his removal from any positions he holds as a plan fiduciary. In addition, the suit asks for the appointment of an independent fiduciary to distribute the plan's assets to participants and beneficiaries and to terminate the plan, an action for which Hoskinson and the company must pay.
“Plan funds must be invested in the interest of workers and retirees, not used to prop up a struggling firm,” said Crisanta Johnson, Los Angeles regional director of the DOL’s Employee Benefits Security Administration, in a statement. “Too often, we see employee stock ownership plan funds used illegally by company owners and management to bolster companies. Doing so threatens the financial security of workers and retirees.”
In a past blog post, Phyllis Borzi, assistant secretary of labor for employee benefits security, warned that buying overvalued stock in an ESOP was not something the DOL would take lying down.
“ESOPs are governed by the Employee Retirement Income Security Act, which was passed 40 years ago,” Borzi said in the post. “ESOPs can buy or sell stock — but only at fair market value. Making sure stock is valued correctly is the responsibility of the ESOP’s advisor or valuation expert, but it’s also the responsibility of the company’s owners. And incorrectly valuing stock can be a costly mistake.”
She went on to say, “Since fiscal year 2010, the department has recovered more than $241 million for ESOP violations, most of which involved improper valuations.”
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