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Chemonics Employee Plan Inflated Price Stock Purchase ERISA Class Action

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This class action alleges that GreatBanc Trust, a trustee for the Chemonics International, Inc. Employee Stock Ownership Plan, violated the Employee Retirement Income Security Act (ERISA) as well as its fiduciary duties in buying Chemonics stock at prices higher than fair market value.

The class for this action includes all participants in the Chemonics International, Inc. Employee Stock Ownership Plan, from July 7, 2011 to July 5, 2017, and their beneficiaries. Excluded are those who sold their Chemonics stock to the plan on July 7, 2011, their immediate families, and directors of Chemonics.

The plan was sponsored by Chemonics, a privately-held company, to provide retirement benefits for employees. The complaint says the plan originally held a minority interest in the company—until July 7, 2001, when it bought all remaining outstanding shares of Chemonics common stock, from party-in-interest sellers, including directors and officers of Chemonics. According to the complaint, the price was over $216 million, with only 18,344 shares purchased outright and the other 774,598 financed with a loan at interest, to be repaid over twenty years. To make it worse, the complaint claims that these shares are not readily tradable on an established securities market.

The effect of the transaction, the complaint alleges, was to allow the sellers to unload their shares of Chemonics at an inflated price and burden the plan with millions of dollars in debt to pay for them.

GreatBanc represented the plan as trustee in this ESOP transaction, the complaint claims, and was a “fiduciary” under ERISA rules with discretionary authority over the plan; it was the sole authority that could approve the ESOP transaction. As a fiduciary, the complaint claims, GreatBanc had a duty to the plan to ensure that the prices paid for the stock were reasonable and no more than market value, but it failed in this duty.

Among other things, the complaint claims that the plan paid a “control premium” for the stock, even though it did not obtain control over the company; according to the complaint, sellers of the stock continue to control the Board of Directors.

The complaint further alleges that the “due diligence” performed by GreatBanc relied on unrealistic growth projections, unreliable or out-of-date financial information, and other questionable information which also contributed to the faulty valuation of the stock.

ERISA says that a fiduciary shall not “act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants.” The complaint alleges that GreatBanc violated this and other provisions of ERISA in engaging in transactions that benefited the sellers of the stock but not the plan itself.

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