Former Employee Brings Class Action Complaint Against ESOP in Illinois

On December 17, 2015, the Triad Manufacturing, Inc. ESOP (the “Triad ESOP”) purchased 100% (i.e., 1.83 million shares) of the voting common stock of Triad Manufacturing, Inc. (Triad), a Missouri corporation that “engages in custom [shelving and] fixture manufacturing” for “retail stores with physical locations,” from the Selling Shareholders, including the Co-Presidents of Triad, David Caito, Robert Hardie, and Michael McCormick (collectively, the “Co-Presidents”), for $106.2 million, or $58.05 per share (the “Transaction”); the entire purchase price was financed by loans to the Selling Shareholders.

James Smith, a former employee of Triad, filed a class action complaint on April 15, 2020, alleging that, among other things, (i) in approving the Transaction, GreatBanc Trust Company (GreatBanc), which was appointed as the Trustee of the Triad ESOP on December 21, 2015 (i.e., after the Transaction’s effective date), did not “conduct[] adequate due diligence” and relied upon a valuation report that “was based on unreliable and unrealistic projections of Triad’s future cash flows and earnings” and that “failed to account for the control the primary Selling Shareholders [i.e., the Co-Presidents] retained over [Triad] and the Board’s ability to dramatically dilute the ESOP’s ownership of [Triad], and Triad’s shrinking customer base due to the closure of brick and mortar stores”; (ii) the Triad ESOP’s auditor, BDO USA, LLP, stated in its audit letters to the DOL that it could not “‘obtain sufficient appropriate audit evidence to provide a basis for an audit opinion’ concerning all of the [Triad] ESOP’s financial statements from inception on December 17, 2015 to December 31, 2018,” including “a discussion of the ‘fair market value’ of Triad stock at the time of the Transaction and thereafter”; (iii) GreatBanc did not properly account for the fact that because Triad guaranteed the Triad ESOP’s loans to the Selling Shareholders, Triad “was obligated to contribute millions of dollars to the ESOP on an annual basis to allow the ESOP to make all loan payments due to the Selling Shareholders”; and (iv) as of December 31, 2015 (i.e., less than one month after the Transaction), the value of Triad’s stock was $1.85 per share (a decrease of 97%), and over the next three years, the values of Triad’s stock were $1.15 per share, $1.15 per share, and $0.96 per share, respectively, reflecting that the Triad ESOP paid more than fair market value for the shares of Triad’s stock and, as a result, the Triad “ESOP participants suffered tens of millions of dollars in losses, and their retirement accounts are worth far less than they would have been had Defendants not violated ERISA through their actions in connection with the . . . Transaction.”¹ The Complaint only represents the plaintiff’s claims and allegations. The case is pending, and no rulings have been issued as yet.

¹ Class Action Complaint, Smith v. GreatBanc Trust Company, No. 1:20-cv-02350 (N.D. Ill. Apr. 15, 2020), ECF No. 1.