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Mini-cast 81: The DoL and Wilmington Trust Settlement

The Department of Labor and Wilmington Trust settled three lawsuits and 18 investigations. While not admitting any wrongdoing, Wilmington Trust agreed to pay $88 million in restitution and costs. Bret Keisling discusses the lessons to be learned and the perils of breaching the fiduciary duty to ESOP participants.


Mini-cast 81 Transcript

Announcer: 00:03 Welcome to The ESOP Mini-cast, a great way to wrap up the week.

Bret Keisling: 00:14 Hello, my friends. Thank you for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. Earlier this week, the Department of Labor announced a settlement with Wilmington Trust, which is a subsidiary of M&T Bank. The settlement resolved three ESOP lawsuits and 18 additional investigations, alleging generally that Wilmington Trust breached its fiduciary duty to ESOP participants by overpaying for company shares and often failing to ensure that its advisors were independent. The settlement included Wilmington Trust paying $80 million that will be divided among the effected ESOPs. Wilmington Trust also reimbursed the government $8 million for costs and legal fees, as is sometimes the case in the world of litigation. Wilmington Trust agreed to pay the total of $88 million without admitting any wrongdoing on its part.

Bret Keisling: 01:09 Regular listeners know that I spent seven years as a cofounder and managing director of a boutique ESOP trustee firm. So I thought I'd take a couple of minutes to see what, if anything, we can learn from these cases.

Bret Keisling: 01:21 To start, although there are many reasons to settle litigation or complaints, it's challenging to figure out what lessons can be learned when the resolution is based on allegations made by the Department of Labor, but which aren't admitted to by the defendant, here Wilmington Trust. Nonetheless, the allegations, if true, show insight into troubling practices by Wilmington Trust, some of which reflect the way ESOP transactions used to be done in what some call the Wild West of transactions or "the bad old days." Some of the allegations on the other hand may not have held up to scrutiny even during the earlier days of ESOP transactions. It's worth noting that Wilmington Trust has been out of the ESOP fiduciary business for a number of years now. So although the greater ESOP world can learn from the litigation, it has no practical effect on Wilmington Trust moving forward.

Bret Keisling: 02:14 The ESOP companies whose litigation was settled by the agreement are Graphite Sales Inc., HCMC Legal Inc., and Stargate Apparel Inc. In each of these cases, Wilmington Trust was accused of breaching its fiduciary duty to ESOP participants by overpaying for company shares. In the Stargate Apparel case, Wilmington Trust was accused of using a firm as its valuation advisor that had previously worked directly for the company creating a conflict of interest for the appraisal company. It's worth noting that the transaction took place in 2011 and the ESOP transactional community was just beginning to address inherent conflicts among valuation and legal advisors rotating between the sell side, which is the company, and the buy side, which is the trust. This is an example of a practice that was prominent at the time but is now acknowledged to be inappropriate. I don't know of any professional trustee today who would not ensure that the conflict -- a valuation advisor working for the sell side and then switching over to the trustee side that would not likely happen today. Pursuant to the GreatBanc settlement of 2014, the trustee is obligated to verify the independence of its financial advisors.

Bret Keisling: 03:29 A similar situation occurred in HCMC Legal inc. In that case, the selling shareholders retained a valuation firm to assist it in determining a potential value for an ESOP transaction. When Wilmington Trust was retained as the trustee, it was alleged to have used the company's valuation advisor which resulted in the trustee not having unconflicted advice. It's worth noting that when Wilmington Trust retained the financial advisor, the engagement agreement stated that the financial advisor had no fiduciary or agency relationship with the company. Now that standard has evolved, in part from the GreatBanc settlement, where working for the company in any respect would result in an unresolvable conflict of interest resulting in the trustee disqualifying the valuation advisor and just not being able to use them.

Bret Keisling: 04:21 The allegations in the Graphite Sales case are similar. Now, one aspect of the Graphite Sales case I found interesting was a dispute about the Department of Labor's expert witness. As part of that case, Wilmington Trust filed a motion to have the DoLs expert witness disclose details of the presumably large number of cases that the witness worked on as an expert on behalf of the DoL. The motion to disclose the work was denied by the court, but it raises an interesting and troubling question about DoL enforcement. Like just about every area of litigation plaintiffs, in this case the Department of Labor, and defendants normally trustees and associated parties have their own go-to witnesses. Question raised was whether the expert witness had ever found in any of the cases he investigated that the trustee had acted appropriately. Imagine if in your industry, whatever it is, that an expert repeatedly relied on by the government or an opposing party always found that your side was at fault in every single case. That certainly raises a reasonable question of the independence of the expert witness. Because the court denied a motion to get this information. We'll never know if it's accurate, but it seems to me that it's only fair that parties would know how independent an expert witness really is.

Bret Keisling: 05:39 There's one other point that I found very interesting. It was an allegation by the Department of Labor that Wilmington Trust, which was a powerhouse ESOP trustee, never failed to close a transaction for which it had been hired. Again, Wilmington Trust has not admitted any wrongdoing, so I don't know if this is true or just an allegation, but if it's true, it's breathtaking. In my seven years as a trustee with far fewer engagements than Wilmington Trust, every year there would be at least a couple of transactions that didn't close for a variety of reasons. Sometimes it was agreed that the timing of the transaction wasn't right, but in other cases, the transaction did not close because the trustee, in this case, my firm was not able to reach agreement on a fair market value for the shares.

Bret Keisling: 06:24 Two things always drove me and my partner at the time. First, we always acted with the best interest of participants or potential participants. Sometimes that meant refusing to close the transaction, even if other professional advisors or the selling shareholders were unhappy. The second fact was the trustees have potential personal liability for any breach of its fiduciary duty and I always understood that in every transaction, the fee we were paid as trustees would be dwarfed by any liability if we breached our fiduciary duty.

Bret Keisling: 06:57 In many respects based on the limited information available regarding the Wilmington Trust settlement. It does seem to me that the practices the trustee was accused of are no longer acceptable to ESOP professionals. Hopefully it's another sign that the mentality that used to prevail of getting the transaction done at any cost continues to be replaced by the solid understanding that trustees and its advisors must act in the best interest of the participants at all times. And I think that's an important reminder for everyone involved in ESOP transactions.

Bret Keisling: 07:31 Thank you for spending your time with me today. I hope during the pandemic you and your loved ones stay safe. If there's an issue you'd like to hear discussed, drop us a line. We're always looking for great and important things to talk about. Thanks again for listening. This is Bret Keisling. Have a great day.

Bitsy McCann: 07:48 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.

Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.


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