The U.S. Department of Labor (DOL) has filed a lawsuit against the fiduciaries of a Virginia-based employee stock ownership plan (ESOP), alleging the defendants failed to protect the assets of the plan as it purchased nearly $21 million in company shares from the president of Sentry Equipment Erectors Inc., who was also a trustee of the ESOP.

Filed in the Western District of Virginia, Lynchburg Division, the lawsuit alleges that the owner of Sentry Equipment Erectors, Inc., Adam Vinoskey, sold his stock to the company’s ESOP at an inflated price in 2010. The overpayment caused a direct loss to the plan and constituted a prohibited transaction under the Employee Retirement Income Security Act (ERISA).

The sale also directly injured plan participants who had already earned Sentry stock, as the value of their stock declined because of the company’s substantially increased debt load.  The ESOP’s fiduciaries took no action to protect these participants from large losses to their preexisting retirement assets.

“Employee ownership can be a powerful way to give workers a stake in the fortunes of a company, but only when the interests of the plan are protected against the conflicts that can arise when a major shareholder seeks to sell,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi, quoted in a press release. “When plan fiduciaries rely on unreliable valuations to buy company stock at inflated prices, they often cause serious harm and potentially threaten the long-term financial security of participants.”

The alleged violations relate to a 2010 purchase of Sentry stock from Vinoskey. Before 2010, the plan had already purchased almost half of the company; this earlier transaction is not in question. In December 2010, Vinoskey sold the ESOP his remaining 51,000 shares—fully 52% of the company—at $406 per share, for a total sale price of $20,706,000.

This price greatly exceeded that offered to other participants who had previously sold their shares back to the ESOP at prices ranging from $241 to $285 per share. Immediately after the purchase of the Vinoskey stock, the price offered to participants dropped below $285 per share.

An appraisal performed in November 2010 by Capital Analysts especially for the transaction provided the basis upon which the $406 per share price paid to purchase the Vinoskey stock was based. This appraisal contained substantial errors that overstated the value of the company, leading to a share price far above fair market value.

The department’s suit seeks to restore all losses to the plan, in an amount determined by the court, and to have any profits gained by the defendants from the sale to be turned over to the plan. It also seeks to have plan fiduciaries removed.