Just what every ESOP appraiser dreads: In 2002, the Department of Labor concluded that based on its investigation, trustees of an Ohio insurance company’s ESOP may have violated several ERISA provisions.  In particular, the DOL questioned the method used for valuing the company’s stock (one and a half times total income, plus or minus the positive or negative book value of the company, divided by the existing shares).

After the plan paid $500,000 to correct the violations, the trustees (and the plan’s insurers) sued the valuation firm and its managing director in Ohio federal district court, alleging state law claims of professional negligence and breach of contract as well as breach of ERISA fiduciary duty.  The court granted summary judgment on the ERISA claims in favor of the appraisers, but dismissed the state law claims without prejudice, permitting their re-filing in state court.  The valuation firm appealed to the Sixth Circuit, which just issued its decision in Kloots v.American Express Tax and Business Services, Inc. (May 15, 2007).  An abstract of that decision will appear in the next (Sept. 2007) issue of Business Valuation Update™, with the full-text court opinion available to subscribers of BVLaw™.

ESOP due diligence free download:  In the meantime, given the increasing complexity of ESOP valuations (and increasing oversight), we’ve just added an invaluable checklist to our free downloads.  “Employer Stock Valuation and Financial Adviser Due Diligence Procedures,” excerpted with permission from Willamette Management Associate's Guide to ESOP Valuation and Financial Advisory Services, 2nd Ed., by Robert Reilly & Robert Schweihs (2007), is now available here.