But federal regulators now are taking legal action, alleging that the process by which the Bellows Falls company was sold to its staffers was “fundamentally flawed” and led to “sizable financial losses” totaling millions of dollars for the employee stock ownership plan.
The defendants named in the U.S. Department of Labor’s suit include Sonnax; two company administrators who benefited from the sale; and First Bankers Trust Services Inc., an Illinois financial company that worked on the transaction.
The suit alleges violations of federal law and seeks restoration of unspecified financial losses suffered by the Sonnax employee stock plan.
The defendants “breached their fiduciary responsibilities” and “placed their own interest above those of the plan’s participants who put their trust in the plan, its trustee and other fiduciaries,” said Susan Hensley, director of the U.S. Employee Benefits Security Administration office in Boston.
Sonnax administrators could not be reached for comment Thursday. Brian Ippensen, president of First Bankers Trust Services, said he could not comment specifically on the government’s allegations but pledged the firm will “defend against those vigorously.”
Sonnax was founded in 1978 and specializes in aftermarket auto parts. The corporate website says Sonnax is “one of the fastest-growing companies in the state” and “exports to more than 70 countries and supports emerging markets.”
Sonnax also repeatedly has made “best places to work” lists in Vermont.
In early 2011, Sonnax became an employee-owned company through creation of an employee stock ownership plan.
U.S. Rep. Peter Welch, D-Vt., has visited Sonnax to commend the company and its ownership model. And the company’s website says the stock plan “helps to provide stable careers and local ownership” while allowing “employees to participate in the growth and success of the business.”
Six years after the Sonnax ownership transition, however, the U.S. government has filed a lawsuit in U.S. District Court in Vermont alleging violations of the Employee Retirement Income Security Act.
Labor Department officials take a step-by-step approach in laying out their case, reaching back to 2009.
Before the sale, documents say, Sonnax was owned by two people: Tommy Harmon, a board member who was the company’s president and chief executive officer; and Frederick Fritz, a board member.
Harmon owned 60 percent of Sonnax, and Fritz owned the remainder.
In late 2009 or early 2010, federal officials say, Harmon and Fritz began exploring the idea of selling Sonnax. Initial inquiries with “strategic buyers or private equity” produced little interest and prices that were lower than expected.
That led to consideration of employee ownership.
SES Capital Advisors Inc. and an affiliated law firm were brought in to advise Harmon and Fritz, who estimated their company was worth $48 million to $60 million. SES privately “expressed misgivings” about that asking price, estimating a likely worth of $40 million to $44 million, documents say.
But the sale process moved relatively quickly, with First Bankers coming on as a trustee to negotiate on behalf of the employee stock ownership plan.
In late 2010, a deal was struck: Sonnax would purchase the stock owned by Harmon and Fritz for $48.8 million, then issue new shares that would be sold to the employee stock ownership program for $10 million.
Harmon and Fritz retained their administrative positions after the sale.
But the government says the sale negotiation was “woefully deficient” and the resulting deal was rife with problems.
For one thing, officials allege that First Bankers’ projections of Sonnax’s future growth — and, therefore, its estimates of the company’s worth — were “fundamentally flawed” and far too optimistic.
First Bankers also didn’t properly account for future financial rights obtained via the sale by Harmon, Fritz and “key management personnel,” officials say.
As a result, “First Bankers caused the (employee stock plan) to significantly overpay by millions of dollars for highly leveraged Sonnax stock, thereby failing to loyally and prudently represent the interests of the (employee stock plan) and its participants and beneficiaries,” the government suit alleges.
For their part, Harmon and Fritz “knew or should have known that the work performed by their co-fiduciary First Bankers was flawed,” yet they failed to intervene, federal officials contend.
The Sonnax growth projections were one example cited by the Labor Department. “Sonnax, Harmon and Fritz knew or should have known First Bankers was relying on aggressive and overly optimistic projections which they had provided and even their own advisors acknowledged were unrealistic,” the lawsuit says.
Among other requests, the Labor Department is asking a court to order the defendants to “restore the overpayment and all losses incurred as a result of their violations,” a spokesman said.
Officials did not detail the amount of that alleged overpayment.