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The Commons
Business

Sonnax disputes federal suit

Company seeks dismissal of allegations of violations of the Employee Retirement Income Security Act

Originally published in The Commons issue #401 (Wednesday, March 29, 2017).



BELLOWS FALLS—An auto parts maker denies that its staffers lost millions of dollars in what federal regulators have called a “fundamentally flawed” transition to employee ownership six years ago.

Sonnax Industries — along with two administrators and a financial adviser — filed responses on March 24 to a December U.S. Department of Labor suit that alleges violations of the Employee Retirement Income Security Act.

The defendants want a judge to dismiss the government’s complaint. And they are issuing near-blanket denials of the government’s claims that an employee stock ownership plan overpaid when purchasing Sonnax in 2011.

Sonnax says that, in fact, “there were no actual economic losses or damages.”

And financial adviser First Bankers Trust Services is saying it “acted in good faith and solely for the benefit of the [employee stock] plan and its participants.”

Founded nearly four decades ago, Bellows Falls-based Sonnax specializes in aftermarket auto parts and has enjoyed a good reputation both locally and statewide. The company has made several “best places to work” lists and was hailed as a model for employee ownership.

But late last year, the Labor Department filed a complaint in U.S. District Court against Sonnax and Illinois-based First Bankers as well as Tommy Harmon, Sonnax’s president and chief executive officer, and Frederick Fritz, a company board member.

Prior to 2011, Harmon owned 60 percent of Sonnax. Fritz owned the remainder.

Either in late 2009 or early 2010, Harmon and Fritz began exploring the idea of selling the company. Those deliberations ultimately led to the purchase of Sonnax by staffers through an employee stock ownership plan, with First Bankers negotiating on behalf of the employees.

Sonnax, Harmon and Fritz agree with the federal government on at least one point: In January 2011, Sonnax bought the owners’ stock for $48.8 million, then sold all of the newly issued shares to employees for $10 million.

After that, though, the stories diverge.

The federal complaint portrays the sale process as “woefully deficient,” in part because it allegedly relied on overly optimistic projections of Sonnax’s future value. First Bankers’ improper methods caused the employee stock ownership plan to “significantly overpay by millions of dollars for highly leveraged Sonnax stock,” the Labor Department has said.

Federal officials also say Harmon and Fritz “knew or should have known” that the company had been overvalued for sale purposes, but they did nothing to intervene.

The joint response filed by Sonnax, Harmon, and Fritz doesn’t present an alternative narrative of the transaction. But it does issue a paragraph-by-paragraph denial of most of the federal lawsuit aside from the most basic facts of the sale.

Along with claiming that there were no financial losses suffered by employees, the defendants say they were “not a fiduciary or co-fiduciary with respect to the alleged conduct.”

Overall, the response says, the government “fails to state a claim for which relief can be granted.”

The company and the two administrators want the court to dismiss the complaint, “with prejudice,” at the government’s cost and with reimbursement for the defendants’ attorney fees and costs.

One of the attorneys filing the response is Tristram J. Coffin, a former U.S. attorney for Vermont who’s now working for Downs Rachlin Martin in Burlington.

Filed separately, First Bankers’ response repeatedly claims that the Labor Department has mischaracterized conversations and documents related to the sale.

The company denies “any breach of fiduciary duty” as well as “any allegations concerning overpayment” by the Sonnax employee stock ownership plan. First Bankers says it “obtained adequate consideration” for the company’s assets.

Like Sonnax, First Bankers also seeks to cast doubt on the notion that Sonnax employees lost money in the 2011 purchase.

“The [stock] plan’s alleged losses have no basis in fact and are speculative, abstract and hypothetical in nature,” First Bankers’ response says.

The Sonnax employee stock ownership plan itself also had been named as a defendant in the Labor Department’s suit. But earlier this month, the department and the other defendants filed paperwork stipulating that the stock plan is not required to respond to the complaint.

The employee plan “should remain a party in this action solely for the purpose of ensuring complete relief among the parties,” the document said.

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