Plan Fiduciaries Lose Appeal in Stock Valuation Suit

The Fifth Circuit has affirmed a judgement that plan trustees violated their fiduciary duties under ERISA in facilitating the sale of employer stock into a retirement plan.

A three-judge panel concurred with the determination of a lower court that Herbert Bruister, a retirement plan trustee and owner of Bruister and Associates Inc., as well as fellow plan trustee Amy Smith, violated their fiduciary duties under ERISA, and were ordered to pay $6.5 million for overvaluing the stock, saying the company owner put his own interests above those of the retirees.

In Perez v. Bruister, No. 14-60811 (5th Cir. May 3, 2016), the Fifth Circuit found that Bruister and Smith failed to act in the retirees’ best interest, instead seeking the best result for Bruister’s personal assets; withheld negative information from the firm valuing the stock; and that Bruister’s personal attorney, David Johanson, routinely pressured the valuation firm to appraise the stock higher than its fair market value.

Bruister was one of three ESOP trustees, but abstained from decisions involving the ESOP’s purchase of his shares. However, according to an analysis by attorneys at Paul Hastings LLP, he was nevertheless held to be a functional ESOP fiduciary because he influenced the underlying valuation decisions by:

• firing one appraiser and the ESOP’s independent legal counsel;

• seeking “tweaks” to influence the valuation generated by the successor appraiser;

• changing the assumptions and financial figures that the ESOP appraiser factored into his valuation analysis; and

• actively participating in ESOP trustee meetings during which the ESOP’s purchase from him was discussed.

The U.S. Labor Department had alleged that from 2002 to 2005, Bruister sold to the retirement plan 100% of the shares of BAI — a company that installed and serviced satellite television equipment for DirecTV — for a total of $24 million. The stock was rendered worthless when BAI went out of business in 2008.

Here the court found that the ESOP trustees:

• conducted insufficient investigation into [the appraiser’s] background and qualifications;

• overlooked communications in which “[the appraiser] and [the owner’s personal lawyer] were obviously working together to increase the value’”;

• failed to inform [the appraiser] of significant information and risk factors for the company that should have influenced his valuation; and

• failed to double check or significantly review [the appraiser’s] ultimate conclusions.

The case is Perez v. Bruister et al., case number 14-60811, in the U.S. Court of Appeals for the Fifth Circuit.