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 TROY, Mich., Sept. 20 /PRNewswire/ -- There's a big downside to being a trustee of an employee stock ownership plan (ESOP), said Philip J. Gaglio, a principal of The Lefko Group, a provider of business valuation, litigation support, and business advisory services based in Troy.
 It could cost you a bundle if you're not careful, according to Gaglio.
 Valley National Bank in Phoenix recently found that out when it had to shell out $17.5 million, plus interest, to Kroy Inc.'s ESOP for causing the plan to pay too much for shares purchased as part of the company's 1986 leveraged buyout. The ruling was issued by U.S. District Judge Constance Baker Motley.
 As trustee for the company's ESOP, Valley National approved purchase of 6 million shares of Kroy stock at $5.92 per share while other investors were buying at $1.13 per share. Kroy filed for Chapter 11 bankruptcy protection in May 1990, emerging from bankruptcy six months later.
 The Department of Labor, the plaintiff in the case, charged Valley National, since acquired by Banc One, with violating its fiduciary obligan? by not conducting an independent good-faith inquiry of the buyout transaction, not negotiating the terms of the ESOP's participation, paying more than what a willing buyer would pay, and consequently costing the plan $17.5 million.
 Said The Lefko Group's Gaglio, the trustees should have had an independent business valuation firm review the company's financial statements prior to purchase of the shares and have it assess whether the company could service its debt and meet its post-buyout sales and earnings projections.
 "The ruling sounds a warning to all companies with an Employee Stock Ownership Plan or considering establishing an ESOP. It points up that trustees have a fiduciary responsibility to determine the fair market value of a stock in transactions like this. Such determination cannot be done cursorily and requires the use of experts," Gaglio said.
 Failure to do so can result in staggering costs to trustees, he said.
 -0- 9/20/93
 /CONTACT: Philip J. Gaglio or Andrew P. Wilkinson of The Lefko Group, 313-528-2373; or Gabriel Werba of Gabriel Werba & Associates, Inc., 313-259-4947, for The Lefko Group/

CO: The Lefko Group ST: Michigan IN: FIN SU:

ML-JG -- DE010 -- 3716 09/20/93 13:31 EDT
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Publication:PR Newswire
Date:Sep 20, 1993

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