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ERISA Lawsuit Alleges that ESOP Fiduciaries Cheated Participants

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Deliberate scheme took nearly a year to unfold

Chicago, ILParticipants in the West Monroe Partners Employee Stock Ownership Plan (ESOP) filed a class action ERISA lawsuit claiming that the ESOP’s fiduciaries and the Trustee shortchanged them of the value of the company’s stock when West Monroe sold half the company to an outside investor. At its most elemental, the scheme described in Daly v. West Monroe Partners Inc. involved using participants’ retirement savings to enrich the company insiders. The details, however, suggest a careful plan carefully executed in several steps over almost a year.

It's a well-worn scam that involves an employee retirement plan primarily invested in company stock, a privately-held corporation and some very questionable appraisals of the value of the stock. Few of these ERISA lawsuits are litigated all the way to a judgment. Many more have ended in hefty settlements for the plaintiff participants. Daly seems to have gone fairly quiet since it was filed in late 2021. We may learn more in coming months.

The timeline

In 2012, West Monroe Partners announced that it had restructured the company, transferring 100 percent ownership to an ESOP trust. The trust held assets of the ESOP retirement plan. ESOPs are a form of defined contribution plan designed to invest primarily in employer stock. They are often touted as a way of giving employees an ownership interest in a business. In a nutshell, participants in the West Monroe Partners ESOP owned the entire company.

By 2015 West Monroe Partners Inc. had been named to the Crain’s Chicago Business list of more than 300 largest privately-held companies in Chicago. In January 2021, the company announced a “key enhancement to its ownership model.” The “Capital & Profits Interest Program” created an additional avenue for senior company insiders to buy company stock outside of the ESOP, thus diluting the ESOP participants’ ownership interest. The same press release noted that West Monroe had achieved a 23 percent compounded annual growth rate over the previous 10 years.

In the following years, West Monroe Partners allegedly took steps to drive up the company’s value, position it for a sale, and enable high-ranking employees to reap the profits. These included laying off highly compensated employees and acquiring other companies to shore up gaps in its expertise.

The April 2021 valuation

Nonetheless, an April 2021 valuation of the company’s stock pegged the value at only $515.18 per share. It should be noted that privately held companies, because their stock is not traded on a public market, are difficult to value.

Ordinarily, this is done by comparing the private company to established public companies of comparable size and growth in the same industry. Reputable companies do this with the assistance of independent outside advisors. These advisors are hired by corporate management, however. When corporate insiders have a financial interest in a transaction that is at odds with the interests of retirement plan participants, the independence and judgment of the advisor may come into question.

The stock buyback and sale

Thereafter, the company bought back 28,000 shares of company stock at the April valuation price. Then, in October 2021 Monroe Partners sold half of the company’s stock (described in the company announcement as “a strategic investment”) to MSD Partners, L.P. According to the Complaint, MSD Partners paid approximately $2,500 per share. This was roughly five times what the company had paid the ESOP for the shares that it had repurchased six months earlier.

The company insiders who had had the chance to buy company stock got $2,500 per share. Participants in the ESOP, saving for their retirement, had gotten $518.18 per share, apparently losing out on almost $2,000 per share. They then filed this ERISA lawsuit.

ERISA is designed to prevent corporate self-dealing        

Section 404 of ERISA requires fiduciaries to act solely for the benefit of plan participants and beneficiaries. They must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in conducting a similar enterprise. The Complaint argues that the named defendants were consequently required to conduct an adequate inquiry into the value of company stock held by the ESOP.

Further, the Complaint points out that ERISA also requires a fiduciary who delegates its fiduciary responsibility to another (as the company had delegated the task of valuing the stock to Argent Trust Company, another named defendant) nonetheless retains a duty to monitor that delegate’s performance of those responsibilities in accordance with ERISA fiduciary standards.

A track record of lawsuits and settlements  

ESOP lawsuits are not new, and by now there appears to be a track record of lawsuits and healthy settlements. The settlement in Walsh v. Reliance Trust Co. netted nearly $9.4 million to participants in the Kurt Manufacturing Company Employee Stock Ownership Plan. Gamino v. KPC Holdings alleges a similar scheme. There will certainly be more to come.


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