TBM Consulting Workers Sue Lubbock National Bank for ERISA Fraud
TBM Consulting bills itself as experts in supply chain technology. Based in Morrisville, North Carolina, the company was founded in 1991. In 2003, the company created an Employee Stock Ownership Plan or “ESOP.” These plans are regulated like pensions and are subject to ERISA, the Employee Retirement Income Security Act of 1974.
ERISA is a powerful law designed to protect employees and pension plan recipients. Two of its provisions prevent certain insider transactions and acts that are imprudent or “disloyal” to plan participants.
If structured properly, an ESOP can be a win-win for both the company and its employees. Workers gain ownership in the company. In return, those workers are generally more productive and vested in the success of the company since they are considered owners.
There are also valuable tax breaks associated with ESOP plans.
In 2011, just 4 years into the ESOP plan, TBM Consulting’s president and CEO, Anand Sharma, decided to sell most of his 78 million shares of the company. Because there was no ready market for these shares, Sharma thought the ESOP would be the ideal buyer.
While not technically illegal, such insider transactions are fraught with peril.
Just before the sale was to take place, Sharma allegedly convinced the company’s board to name Lubbock Bank as the ESOP’s trustee. Under federal law, that means that no matter what the relationship between Sharma and the bank, the bank as trustee took on a fiduciary duty to the plan and its participants.
A fiduciary duty is the highest duty of loyalty recognized by law.
Lubbock National Bank, as the trustee for the plan, needed to value the shares being sold by Sharma and purchased by the employees. Unlike publicly traded securities where market values are established by the market and listed on stock exchanges, privately held shares can be difficult to value.
Lubbock National hired a company called Stout Risius Ross (SRR) to serve as an independent financial advisor. But just how “independent” was SRR? A group of TBM Consulting employees think that SRR was in Sharma’s pocket.
The workers say that SRR relied on projections by Sharma when setting the value of his shares. They say the projections were grossly inflated. That meant Sharma made a windfall profit and his workers paid the price.
Hindsight is a wonderful thing. In 2016, several TBM workers realized that Lubbock National Bank was being sued with respect to another company’s ESOP. The allegations were that the plan paid far too much for shares being sold by company insiders. The workers also realized that the revenue projections made with respect to TBM were overly optimistic.
They quickly concluded that they had been duped, that their shares were worth much less than they had paid and that Lubbock as trustee had been accused by at least one other company with being asleep at the switch.
Remember that even though Lubbock hired SRR to value the stock, Lubbock National had the fiduciary duty to act in the best interests of the plan participants.
According to the employees, “Lubbock owed the ESOP the highest duty of loyalty and was required to act solely with the interests of the ESOP in mind in insuring that that the price paid by the ESOP for the shares owned by parties-in-interest constituted adequate consideration.” This is especially true when the shares being sold to the ESOP come from a company insider.
Ultimately, four members of the TBM Consulting ESOP filed suit. Lawsuits filed under ERISA are filed on behalf of the plan.
The four filing the complaint say that “Despite Lubbock’s unfamiliarity with TBM, its knowledge that the future projections were heavily influenced by Sharma (whose obvious interest was to maximize the amount paid by the ESOP) and its knowledge that the actual historical performance of TBM was dramatically different from the projections, Lubbock rushed to close the ESOP transaction within a month of its appointment, ignoring the multiple red flags before it.”
Lubbock National Bank Seeks to Dismiss ERISA Claims
Like most banks, Lubbock National appears to be gearing up for a procedural war. In our experience, banks don’t want to litigate in front of a jury. They instead engage in active motion practice with the hope of either winning on a technicality or simply wearing down the other side.
Their first salvo was to seek to dismiss the workers’ complaint because those workers don’t “adequately” represent the other workers in the plan.
In throwing out the bank’s motion to dismiss, the court noted that the bank cited to no legal authority to support its position. Last month the bank tossed the bank’s motion and ruled the workers’ ERISA claims can proceed.
ERISA Fraud Involving Company Stock
Many recent ERISA fraud cases involve companies that encourage or require their employees to invest their pension or 401(k) plan monies in shares of the company. Often these inside involve accounting fraud, improper valuation or other shenanigans.
The risk is even higher when it is a company insider that is the one selling the shares. In fact. these insider transactions are so risky that they are considered a prohibited transaction. ERISA prohibits a fiduciary from causing a plan to engage in a transaction if it knows or should know that the transaction constitutes a “direct or indirect sale or exchange”, or leasing, of any property between the plan and a party in interest; or transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan.
As noted in the TBM case, however, there is an exception when there is an independent valuation of the insider’s shares.
Victim of ERISA Fraud? Did Your Employer Steal Your Money?
No matter how large or small the company you work for, you are trusting your money and retirement plans to someone else. ERISA says that many of the people associated with the plan have a fiduciary duty to both the plan and the employees who rely on that plan.
Large or small, suing your employer is not easy. If the fiduciary is a bank or accounting firm, the odds can seem daunting. Our fraud recovery lawyers can help you flip those odds in your favor. We have helped recover billions of dollars and from some of the biggest and most powerful companies in the world.
If you think you have been cheated or that your employer has withheld funds from an ESOP, pension plan, 401(k) or the like or engaged in illegal insider transactions, call us. We handle ERISA claims on a contingent fee basis meaning you don’t owe us anything for our services unless we recover money on your behalf.
For more information, visit our ERISA fraud page. Want to know if you have a case? Contact us online, by email or by phone 414-704-6731. All inquiries are protected by the attorney – client privilege and kept confidential.