Worker stock plan is target of feds' suit

San Fernando Valley Business Journal, May 27, 2002 by Carlos Martinez

The U.S. Department of Labor has accused Sun Valley-based Westfield Precision Products Inc. of improperly appraising the value of its stock in order to profit from the elimination of an employee stock ownership plan.

The suit, filed in U.S. District Court in Los Angeles, says company officials Ted and Alan Dearman violated the Employee Retirement Income Security Act by using an improper valuation of the company's stock in order to redeem it at a fraction of its value.

Westfield Precision Products is an aircraft parts manufacturer founded in 1963 by Alan Dearman and the late George A. Smith. Westfield, with 40 employees, had revenues last year of about $5 million, according to Anthony Vienna, an attorney representing the company.

The suit, filed April 29 by the Los Angeles regional office of the Labor Department's Pension and Welfare Benefits Administration, claims the Dearmans failed to serve properly as fiduciaries of the Employee Stock Ownership Plan.

The suit seeks to recover the difference between the actual value of the plan and the amount employees received when it was dissolved, including lost interest. It also seeks to bar the Dearmans from serving as fiduciaries or service providers to any plan covered by the Employee Retirement Income Security Act.

"ESOP fiduciaries must ensure that transactions in employer stock are based on appropriate values and that they act to protect the interests of participants as shareholders," said Billy Beaver, regional director of the Labor Department's Pension and Welfare Benefits Administration.

Vienna, speaking for the Deanmans, denied any wrongdoing on his clients' part.

"The charges are based on incomplete information and are totally invalid," said Vienna

According to the lawsuit, after its co-founder George A. Smith died in 1990, the company divided all 150 shares of its stock between the George A. Smith and Louisa Smith Trust and the Alan Dearman & Bobbie J. Dearman Trust. Later that year, the company established an Employee Stock Ownership Plan and the two trusts each sold half of their shares (a total of 74) to the program for $4.4 million, funded by a loan from the company to the plan.

The deal made the employee plan the majority shareholder in the company.

In 1991, the Deanmans, through their trust, bought out the Smith Trust for $1.6 million, or $42,564 for each of the 37 shares it owned. The deal gave the Dearmans 50.7 percent of Westfield's outstanding stock.

In November 1997, the company announced it was dissolving the Employee Stock Ownership Plan and the Dearman Trust agreed to purchase the Plan's 74 shares of Westfield stock from its employees for $2,971 a share, or $219,854.

The government contends that Alan Dearman and his brother Ted, who headed the Dearman Trust, undervalued the stock price in order to pay their employees only a fraction of what the stock was really worth.

Only 32 of the 39 plan participants accepted the Dearmans' price. Seven others filed suit against the Trust in May 1998, claiming the stock value was closer to the $42,564 paid to the Smith Trust seven years earlier than the $2,971 offered to employees.

The Dearmans settled out of court for $1.25 million, or about $50,607 per share.

The Labor Department's Beaver said the final settlement with the seven plan participants included a confidentiality agreement that barred them from telling those employees who did not sue the Dearmans about the settlement.

Former plan participants reached at the firm would not comment.

Vienna said the company did not violate any laws, but admitted the situation is "complicated."

"Appraisers themselves differ about how much a company's stock is worth," he said. "It's difficult to decide the value of a closely held business like this. You have to look at earnings history, the trends in the industry, the capitalization rate, a lot of things."

Vienna said he will file a formal response to the lawsuit by June 27.

Kurt Kampe, a labor attorney with the Santa Clarita law firm of Kampe & Kampe, who reviewed the suit, said the government appears to have a good case.

"If the allegations and complaints are true, this would appear to be a fairly clear-cut case with significant liability of the company and plan fiduciary," Kampe said.

"You don't see these cases that often, but the allegations are that they did a lot of self dealing and put a lot of money into their own pockets, so the government can't ignore that."

The fact the company settled a lawsuit for a much higher stock price than that offered others is perhaps the most damaging evidence against Westfield, Kampe said.

But he cautioned that laws involving the Employee Retirement Income Security Act are complicated and violations are sometimes difficult to prove.

"The real question becomes whether the company can survive a big payout, if it gets to that," he said.