In January 2014, the West Des Moines healthcare company Telligen posted a message to Facebook celebrating its new employee stock ownership plan. “It’s official! Telligen is now an ESOP company. We are excited about increasing employee participation in corporate ownership and look forward to all 2014 has to bring!” It wasn’t long, however, before questions arose.
The company’s workers paid $37.5 million for Telligen’s 1 million shares — a price of about $37.50 per share. But just a few weeks later, those shares were valued at just $6.25. Were the workers overcharged? That’s the question posed by a class-action lawsuit now working its way through the federal court system. Lawyers for the Telligen employees say the workers were “ripped off” and lost millions of dollars when they purchased the company.
The lawsuit coincides with a wave of enforcement actions by the U.S. Department of Labor aimed at trusts that specialize in ESOPs, or employee stock ownership plans. Federal officials say too many companies are being sold to rank-and-file workers at inflated prices that make corporate officers rich at the expense of their own employees.
Because ESOPs are often promoted as a valuable source of retirement savings, one that’s corrupted by an inflated sale price can have a devastating effect on workers’ financial health.
In the past few years, the Department of Labor has filed lawsuits challenging transactions involving ESOPs at several companies. In each case, the employees bought shares of their company at inflated prices and were subsequently saddled with crushing debt loads.
“Accurate company valuations are critical when it comes to establishing an employee stock ownership plan,” said Jonathan Kay, a Department of Labor administrator. “Too often, company owners seek to inflate the price to benefit themselves at the expense of workers.”
The Telligen lawsuits pit the company’s ESOP against Bankers Trust Co. of South Dakota, which acted as the trustee for the ESOP and helped structure the deal that turned Telligen into an employee-owned corporation.
As trustee, Bankers Trust represented the employees’ interests. After allegedly consulting with an independent appraiser, the bank valued the 1 million shares of Telligen at $37.50 each, then arranged for the plan to borrow the full $37.5 million from Telligen, payable over 20 years at 6 percent annual interest.
But according to court records, shares of Telligen were valued at just $6.25 a few weeks after the deal was executed. The lawsuit alleges that Telligen’s principal shareholders “profited by saddling the plan and Telligen employees with millions of dollars in debt.”
The lone named plaintiff in the lawsuit, Deb Innis, is a communications expert who worked for Telligen for 18 years. She is suing Banker’s Trust on behalf of herself and other employees who bought into the plan.
Lawyers for the bank and the ESOP declined to comment but outlined their opposing views in a court hearing last year.
At that hearing, an attorney for Bankers Trust stated that the value of the employees’ shares increased from $6.25 to almost $26 in the two years after the sale.
In response, plaintiffs’ attorney Ryan Jenny said that the increased value was irrelevant to the question of whether the initial purchase price was inflated, noting that any added value would only compound the losses sustained by employees.
“It doesn’t matter whether there was, you know, a rise in stock value down the road,” he argued. “The question is, ‘Did the plan pay too much on Dec. 31, 2013?’ … Every (employee) will get fewer shares of stock if the plan was ripped off in the first instance.”
Jenny pointed out that the bank was engaged to handle the sale of Telligen in November 2013 and completed the sale at the end of December 2013.
“It took me longer to negotiate the sale of my house than it took the trustee here to negotiate the sale of a $37.5 million company,” Jenny told the court. “We see again and again in the ESOP industry that these trustees are rubber-stamping these transactions.
“That’s what we’re alleging happened here, and we have another recent case — against this same defendant — where we got a $19.8 million settlement.”
The settlement Jenny referred to is tied to a pair of lawsuits filed by the U.S. Department of Labor and the employees of Mona Vie, a multi-level marketing company that sold fruit and vegetable juice concentrates. In that case, Mona Vie’s owners sold $186 million worth of shares to its workers so they could assume ownership of the company.
But the employees would later sue Bankers Trust, alleging the per-share price they paid was “grossly inflated.”