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 planparticipants to lose money when the plan bought additional companystock at considerably more than fair market value in twotransactions totaling $2.6 million.

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The suit says that, instead of the money being put aside to fundthe retirement accounts of Gruber retirees, it was channeled intothe stock purchases to shore up the company during financialtroubles.

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Gruber provides molds, automation equipment, and supplies forthe cast polymer and other composite-related industries.

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The DOL suit seeks a reversal of the $2.6 million in prohibitedstock transactions, the restoration of any related plan losses,including lost opportunity costs, and a court order requiring thedefendants to account for and restore losses to planparticipants.

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In addition, the DOL is also seeking permanent enjoinment ofHoskinson from serving as a fiduciary or service provider to anyplan covered by the Employee Retirement Income Security Act and hisremoval from any positions he holds as a plan fiduciary. Inaddition, the suit asks for the appointment of an independentfiduciary to distribute the plan's assets to participants andbeneficiaries and to terminate the plan, an action for whichHoskinson and the company must pay.

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“Plan funds must be invested in the interest of workers andretirees, not used to prop up a struggling firm,” said CrisantaJohnson, Los Angeles regional director of the DOL’s EmployeeBenefits Security Administration, in a statement. “Too often, wesee employee stock ownership plan funds used illegally by companyowners and management to bolster companies. Doing so threatens thefinancial security of workers and retirees.”

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In a past blog post, Phyllis Borzi, assistant secretary of laborfor employee benefits security, warned that buying overvalued stockin an ESOP was not something the DOL would take lying down.

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“ESOPs are governed by the Employee Retirement Income SecurityAct, which was passed 40 years ago,” Borzi said in the post. “ESOPscan buy or sell stock — but only at fair market value. Making surestock is valued correctly is the responsibility of the ESOP’sadvisor or valuation expert, but it’s also the responsibility ofthe company’s owners. And incorrectly valuing stock can be a costlymistake.”

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She went on to say, “Since fiscal year 2010, the department hasrecovered more than $241 million for ESOP violations, most of whichinvolved improper valuations.”

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