Employee Group Claims Executives Profited Improperly : Parsons Sued Over ESOP Buy-Out
Parsons Corp. was sued Monday by a group of its employees who charged that Parsons executives and directors violated federal pension laws and profited improperly when the Pasadena engineering firm was taken private in a leveraged buy-out last January.
The case, which was filed in Los Angeles federal court, may set a precedent in the corporate use of employee stock ownership plans to execute leveraged buy-outs of public shareholders, according to pension experts.
Parsons--along with its directors, executives and Bank of America, its lender--are charged with violating the federal Employee Retirement Income Security Act (ERISA), negating pension plan agreements, breaching their fiduciary duties and wasting corporate assets.
The class action, filed by 15 employees, alleges that Parsons directors and executives received $16.9 million in the buy-out for their Parsons shares, representing a 33% premium over the existing market price.
The complaint asks that directors be ordered to disgorge profits that they earned in the buy-out, restore Parsons assets that were allegedly wasted and provide for equal treatment of all employees. Punitive damages of $200 million are also demanded.
The company denied the charges and said it structured the buy-out to be as fair as possible to the largest number of employees. Parsons Chairman William E. Leonhard said the company intends to fight the suit and will not negotiate a settlement.
“We made every effort to make this transaction totally clean,” he said. “We are confident that rightness is on our side.”
In a letter distributed Monday afternoon to Parsons employees, Leonhard said: “Actions by this small dissident group, that has persisted throughout the ESOP buy-out, threatens irreparable harm to your company.”
‘Big Myth’
In the past, he has said that actions of dissident employees have raised concern among the firm’s customers, bankers and other employees.
Robert M. Davidson, Parsons senior vice president, branded the allegation that management and directors reaped large profits as a “big myth.” He also said the 15 employees who filed the suit are primarily from a single job site in Mexico and were not well informed about the Parsons plan.
The suit charges that the Parsons deal violated ERISA because employees were left worse off with respect to their retirement benefits immediately after the buy-out.
ERISA provides that any consolidation of a retirement plan provide for equal or greater benefits immediately after the change.
Sara P. Levitan, one of the attorneys representing the Parsons employees, said the Parsons plan is also unfair because of the way it treats the unvested shares held by laid-off employees. Those shares will yield greater benefit to management and senior employees than others, she said.
The Parsons deal was the largest employee stock ownership buy-out in U.S. history. The employee plan paid $518 million for the 65% of Parsons shares that it did not already own.
The Labor Department has been reviewing the Parsons case for about six months. The Internal Revenue Service has yet to certify the plan.
Senior Labor Department officials have declined to discuss the Parsons plan, but they have said in recent speeches around the country that they intend to scrutinize ESOP leveraged buy-outs closely.
An executive of a major benefits consulting firm in Los Angeles, who asked not to be identified, said the uproar over the Parsons deal is just the beginning of scrutiny that such deals are likely to come under.
Several U.S. House committees are also preparing to hold hearings into the deals.
“I wouldn’t touch a leveraged ESOP with a 10-foot pole,” the executive said. “I don’t believe in them and I won’t sell or promote them.”
