“Fair to Everyone” is Unacceptable in an ESOP Transaction

Posted · Add Comment

On Friday August 2, 2019, U.S. District Judge Norman K. Moon in the U.S. District Court for the Western District of Virginia ordered that Adam Vinoskey, the CEO of Sentry Equipment Erectors, Inc. (Sentry), and Evolve Bank and Trust (Evolve) are jointly liable for the losses an employee stock ownership plan (ESOP) suffered in a 2010 transaction wherein the ESOP purchased Vinoskey’s shares.

[Acosta v. Vinoskey et al., case number 6:16-cv-00062, in the U.S. District Court for the Western District of Virginia]

In the order, Judge Moon found that Evolve, which represented the ESOP in the 2010 transaction, breached its duty of prudence to plan participants, and violated its duty of loyalty by failing to act in the interest of the participants. Judge Moon found Evolve’s due diligence for the deal was “rushed and cursory” which resulted in the plan engaging in a prohibited transaction in which Vinoskey knowingly participated.

In the transaction, Evolve relied on a nearly $21 million valuation provided by an independent appraiser hired by Evolve. However, Judge Moon found Evolve ignored or failed to adequately probe red flags in the valuation performed by the appraiser. Further, Evolve did not negotiate in the transaction to lower the price paid for Vinoskey’s stock, and made its offer before the independent appraiser even responded to the concerns Evolve did bring to light on the valuation. Judge Moon noted, “At the very least, the fiduciary should actually review the expert’s final appraisal before relying on the expert’s range of fair market value, negotiating a price, and closing the deal.”

Specifically, Judge Moon noted the testimony provided by an executive at Evolve, who had indicated that they wanted to obtain a deal that was “fair to everyone.” While many would think this sentiment seems reasonable, in an ESOP transaction, it is the bank’s (in this case, Evolve’s) obligation to act only in the ESOP participants’ interest.

Judge Moon also concluded that Vinoskey should be held co-liable, along with his trust, as both a knowing participant and as a co-fiduciary. Judge Moon indicated that Vinoskey knew, or should have known, that the price he received for his shares was too high, even if he was unaware of the flawed fiduciary process.

Judge Moon concluded the plan had overpaid for the stock by $6.5 million.

Additional Case Analysis

DOL Scores $6.5M Win In Suit Over Employee Stock Deal

Post-trial Briefs in Vinoskey ESOP Trial Point to Fierce Valuation Fight

Judge Rules on DOL ESOP Challenge with Mixed Results