The Department of Labor has filed a lawsuit that says the fiduciaries for the employee stock ownership plan (ESOP) of BAT Masonry Company, Inc. breached their fiduciary duty by engaging in prohibited transactions of the company's stock, along with other actions.
The lawsuit, filed in the U.S. District Court for the Western District of Virginia, says that in July of 2010, the fiduciaries paid $13 million too much for company stock for the plan, which was established as of May 1, 2009.
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BAT Masonry, the plan's sponsor and administrator, was valued by the company BAT hired for the purpose: SMK.
However, according to DOL, SMK valued the firm for $13 million more than it was actually worth.
Subsequently, plan trustees Wayne B. Booth, Gregory Booth and Melvin Hinton approved purchase by the plan of all the BAT stock that was owned by the Wayne Booth Revocable Trust, an entity controlled by Wayne Booth.
The ESOP paid $1.6 million in cash and also signed two promissory notes in the amount of $11.9 million, making the total purchase price for the company stock $13.5 million.
However, according to DOL's suit, the valuation SMK gave to BAT was based on errors. Not only did SMK fail to take into account the fact that BAT's business was deteriorating, it incorrectly categorized $5.8 million, previously withdrawn from the company's account by Wayne Booth, as an account receivable.
Booth never intended to repay the money.
There were other errors in the SMK valuation as well, all of which the trustees ignored, despite knowing the true financial condition of BAT.
Just months after the stock purchase, in December of 2010, BAT hired a different firm to value the company. The result was substantially different: BAT was valued at just $163,590.
In addition, Wayne Booth continued to take money from company accounts even after the ESOP purchase was completed, to the tune of $1.25 million.
He did this despite no longer having an ownership interest, and the company categorized those outgoing funds as ESOP payments to Booth despite the fact that the ESOP received nothing for them.
By mid-2012, BAT went out of business and made all the stock worthless. There was, according to the DOL, no formal action taken to end the company's existence, and the ESOP trustees simply walked away without notifying anyone—including the employees.
However, the trustees were not yet done with the masonry business; Gregory Booth and Hinton launched M.H. Masonry, employing many of the same people who had worked for BAT and operating out of the same address as BAT.
It also managed to buy up BAT's equipment "at a significant discount," according to the suit.
The suit names Bat Masonry, Wayne and Gregory Booth, Melvin Hinton, Jonn Rosser, James Joyner, the Wayne Booth Revocable Trust, the Bat Masonry Company, Inc. Employee Stock Ownership Plan & Trust, Wayne B. Booth Investments, LLC, BST Enterprises, LLC, M.H. Masonry & Associates, Inc., and Sheldrick, McGehee & Kohler LLC and seeks to have fiduciaries restore all losses to the ESOP; "disgorge … unjust enrichment"; bar them from serving as fiduciaries in the future and also seeks other unspecified relief.
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