The trustee of Miller’s Health Systems Inc.’s employee stock ownership plan cheated that plan and its employee owners in a September 2007 transaction, the U.S. Department of Labor alleges in a lawsuit.
The suit, filed within the past week in northern Indiana’s U.S. District Court, seeks to recover those losses. The amount is unspecified.
Warsaw-based Miller’s Health Systems owns and operates Miller’s Merry Manor, a group of 32 residential nursing homes with more than 3,000 employees in Indiana.
Louisville, Ky.-based PBI Bank Inc., the trustee, authorized a $40 million payment for company stock on behalf of the employee stock ownership plan, or ESOP, six years ago.
The Labor Department alleges that bank officials should have known the sale price was an amount far in excess of the fair market value of the stock for various reasons outlined in the court filing.
Phyllis Borzi, assistant secretary of labor for employee benefits security, said PBI was responsible for protecting Miller’s employees’ interests.
Fiduciaries must act with undivided loyalty to plan participants, she said in a statement. When it comes to ESOP stock purchases, they must ensure that the plan receives full value for its money.
Federal officials say a series of maneuvers in September 2007 rewarded four members of the Miller family and some members of the company’s executive management team at the expense of workers.
The Millers and company executives are not named as defendants.
Those financial dealings were spelled out in documents prepared by PBI Bank’s attorney, the government alleges.
Lori Haug, Miller’s chief financial officer, said PBI Bank and the Labor Department have different interpretations of the facts. We will let the court sort those differences out, she wrote in an email.
However, PBI’s job was to make sure that the ESOP was treated fairly. If that didn’t happen, Miller’s Health expects PBI to reimburse the ESOP and the company for any damages.
PBI Bank officials could not be reached for comment Thursday.
The court filing outlines maneuvers that include a series of financial transactions – all completed in a single day – that provided the money the ESOP used to buy the stock.
Miller’s Health borrowed $40 million from a bank and lent it to the ESOP at 5.09 percent interest. Next, the employee stock plan paid the Miller heirs $40 million for their remaining shares.
Then, the shareholders lent the same $40 million to Miller’s Health for a term of 10 years at 12 percent interest. Finally, the company paid back the bank and closed out the loan.
The Labor Department alleges the $40 million payment was too high for several reasons, including:
The payment wasn’t for 100 percent of the company. Before selling their remaining ownership in the company to the employee stock ownership plan, the Miller heirs sold 20 percent of their interest to the ESOP in exchange for 40 percent of Miller’s future profits over a certain benchmark.
The remaining 80 percent of the company was whittled down even further. Another transaction reserved 20 percent of the remaining stock for incentive stock options available only to Miller’s Health executives.
The firm that was hired to place a value on Miller’s Health originally factored a 5 percent discount into its quotes because the shares aren’t publicly traded. But when the deal was completed a year after the last of three dated quotes, the valuation didn’t include that discount. The Labor Department contends PBI Bank officials should have noticed the omission.
The sales agreement included a clause that kept the existing board of directors in place for 10 years. The ESOP was paying more than full market price for a company without gaining full control for 10 years, a fact that reduced the company’s short-term value.
About 11,000 companies have employee stock ownership plans, covering more than 13 million employees, according to the National Center for Employee Ownership. ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies and to motivate and reward employees.
Federal officials have requested that the U.S. District Court require PBI Bank to pay equitable, just and proper compensation to Miller’s Health Systems Inc.’s employee stock ownership plan.
It’s unclear whether the Labor Department has an estimate of the alleged losses or whether criminal charges might be filed in the future.